Margin loan to finance real estate

Rather than guess, play out scenarios and what you would do. Assume you have taken a loan against your securities, paid off your house and lied to the bank about your margin loan and thus opened up a HELOC (I don't think they'd let you open up a HELOC with the loan on the books).

Scenario 1:

Markets crash: borrow from HELOC and put into trading account to avoid margin call. Transfer back afterwards.

Scenario 2:

...

Etc

Once you've gone through this exercise, then I think you'll know better what you should do.
 
andrew black said:
https://www.elitetrader.com/et/thre...-margin-loan-for-real-estate-purchase.281768/ five year old discussion (IB is quite similar with your link).
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oh I would have preferred something more official in regards to IB stating its ability to use margin loan for Real Estate.

However, assuming this is the best opportunity cost, I would go with the lowest interest rate loan you can get to maximize returns/savings on the RE deal.

Would be curious on updates if you do the deal. Best of luck
 
andrew black said:
That would work as well but I can foresee two major issues:
  • selling securities to pay for property would trigger a large capital gains tax bill
  • mortgage qualification might be an issue as I do not have regular employment income. Margin loan qualification is asset based.
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You might qualify for a mortgage without income. I got my mortgage based on assets. The thing is that the bank had to hold my mortgage on their books (they can’t sell it via an asset backed security).

What will it cost you to hedge your account to avoid a margin call at all costs? That would represent a real risk of ruin for you.

While I do something like this, all my assets earn on their own. So if an engine on my financial 747 shuts down I can still manage my financial leverage with the other three.

If you can’t do that this could represent a real risk of ruin. Another guy on her essentially levered his his deferred tax liability and now he’s essentially lost a decade of wealth creation as a result of 3 months of unfortunate trading.
 
andrew black said:
I am thinking to take a $500k margin loan to finance a property and I am trying to make a pro - con list. This is what I have until now:

Pros:
  • very competitive interest rate - equal or better than a mortgage.
  • no repayment constrains
  • no qualification issues (as most of my income comes from dividends & capital gains, no employment income)
  • no immediate taxes on capital gains
Cons:
  • need to monitor the margin closely to prevent a margin call
Looking for some feedback on this, maybe from people who did something similar. TIA.
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It would make more sense with an income producing property.

Depending on your acquisition skills, that could be enough of a down and have the seller carry on a larger property or purchase outright on a smaller one. You can then claim the income.

If you are thinking an owner occupied SFR to capture appreciation in a hot market, houses in that tier are the first ones to cool down when the market goes soft.

In either case you’ll want to do a Heloc afterwards to put the liability where it belongs and not have different asset classes cross collateralized. You can do this on SFR and multiplexes, but once you go above 4 units you’re in commercial loan products.

I haven’t flipped deals in awhile so the landscape might have changed. If I were to get into it again it would be in flipping paper to rehabbers on SFR’s, as a hard money lender or commercial storage. Raw land dev is the most profitable but requires the most skill to bring to fruition without an early exit.

RE requires a lot of hustle and it’s certainly harder to buy and sell than with a simple mouse click. Of course this is combined with the knowledge and skill of when to do the mouse clicking.
 
I can't really offer much advice here, as already suggested markets are not currently 'cheap'. But one thing is for sure, when I read threads like this it makes me nervous about putting more of my own money into the market right now like a simple loan source. Back in early 2009 when we were going all in, I couldn't find anyone willing to talk about buying shares...especially taking on debt to do it. How things change.
 
Margin gets tightened up or becomes completely unavailable at market bottoms, especially for illiquid stuff. Implication is that you could be forced to liquidate your stocks at the worst possible unless your leverage is very low. Don't underestimate your risk here. Apocryphal story is there was a trader on here that complained about getting margined out of their highly profitable short trades in April 2020 as margin requirements shot up faster than profits.

Another thing to know is that margin interest used to purchase a primary residence isn't tax deductible in the US.

That said, my friend purchased a house in May 2020 partially on margin and I'd agree the risk/reward was positive in their situation given 75bps vs 275bps and it allowed them to reduce their loan to conforming size when the jumbo market was difficult. Mitigating my concerns was LTV was 20%, collateral was highly liquid so unlikely to ever have a 100% requirement, and they expected pay off the margin loan from income in a few years.
 
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