My main goals in purchasing were:
1. Keep as much money as possible in the stock market so it can continue to compound
2. Secure the largest low-interest interest-only loan possible
3. Put down just enough that I can take advantage of these historically low mortgage interest rates
3. Leverage other people’s money at a low interest rate without actually borrowing their money so they can continue to earn a high interest rate on it in the stock market
I’m doing an LMA for the down payment and traditional 30-year fixed mortgage for the rest. I’m using the LMA instead of liquidating my portfolio because 1) Why give up the gains I can make in the stock market when I can keep my money in the market AND earn appreciation on the property at the same time? I can pay an interest-only loan (that’s cheaper than my mortgage interest rate) on the downpayment 2) I got a family member to move their brokerage account, which they don’t touch, to ML and they agreed to let me take an LMA out against their account too, so I got a much nicer place than I could’ve if I had to put my own cash down. That family member was NOT about to liquidate a portion of their portfolio to lend me a cash for a downpayment. They weren’t willing to lose out on the returns they could get in the market, and rightly so. But since they weren’t planning on touching that brokerage account in the next few years anyway, they (reluctantly) let me borrow against it. It’s for a beautiful property in Malibu that will appreciate nicely, and we have a nice cushion in both of our accounts in case of any black swan events. The property is also very well insured.
I want to reiterate that this person was never going to lend me cash that they had invested in the market. And they were never going to lend it to me at the low rate that ML is going to lend it to me.
The interest rate on the LMA is variable. (You can choose fixed or variable. If you choose fixed there is a hefty pre-payment penalty. If for any reason I need to get out of the property, I want that option). My FA got me about 2% (which is fixed) + Libor (I forget which one, but it’s about 0.14% right now). So I’m paying about 2.14% on a nice sized downpayment—INTEREST ONLY—plus my mortgage. I understand that this number will eventually increase. I can always switch to a fixed rate if we see the LIBOR trending upwards. Or not.
Meanwhile, my money is invested in the stock market, which should grow a hell of a lot more than 3%/year over the next 5 to 10 years. The property has historically appreciated 5% per year (that seems low right? My math might be off). I also plan on Airbnbing one of the bedrooms for a while to help with the mortgage. During the summer months, I may Airbnb the whole place out because it’s in Malibu with an amazing view and you can charge a TON over the summer.
As my money grows, I will need less and less of the family member’s money as collateral for the LMA until eventually none of their money is tied up anymore. When I decide to move, I’ll turn the property into a rental property.
