Kevin Slater Posted July 8, 2022 Share Posted July 8, 2022 I've been wanting to pick up another rental property ever since paying off my last mortgage a few years back, but have been loathe to go through the mortgage application process again. (Last time the stethoscope practically got stuck inside my rectum.) Dawns on me I can simply take a margin loan out from my brokerage account at 5.75% (not bad these days) and come in with a cash offer. As I'd likely be borrowing less than a quarter of the value of that account I wouldn't be particularly worried about getting a margin call. I suspect I could pay the whole thing off in under three years, especially if I curtailed new stock purchases including stopping reinvesting dividends while there was still a margin balance. Apparently there's literally zero paperwork (a big plus in my book). I simply cut a check, and that portion that I don't have cash for goes against margin. Repayment is automatic: whatever cash finds its way into that account simply gets applied toward the margin balance. It looks like I can still deduct the interest (as the proceeds will go toward purchasing an investment property), but somewhat annoyingly it doesn't simply go as a business expense tied to that individual property but rather as an itemized deduction on the top line of my return. Has anyone done this or otherwise have thoughts to share? Kevin Slater Link to comment Share on other sites More sharing options...
+ The Big Guy Posted July 8, 2022 Share Posted July 8, 2022 I have not done this but risk seems low unless the market experiences a “black swan event” with an associated melt down in stock prices i.e. like the initial reaction in 2020 to Covid. Good luck - I like having some rental property in the portfolio. pubic_assistance and BonVivant 2 Link to comment Share on other sites More sharing options...
RadioRob Posted July 8, 2022 Share Posted July 8, 2022 As you noted, the risk is primarily on the margin call. As long as that is within your risk tolerance and having an idea about what do you do in the mean time... by all means! Njguy2 1 Link to comment Share on other sites More sharing options...
Quincy_7 Posted July 9, 2022 Share Posted July 9, 2022 To mitigate the risk of a margin call you could go with some combination of a HELOC on your paid off rental plus a margin loan on your brokerage account rather than fully sourcing your funds from a margin loan. BonVivant and Kevin Slater 1 1 Link to comment Share on other sites More sharing options...
Guest Posted July 9, 2022 Share Posted July 9, 2022 I’ve always maintained a margin capability but only used it once and for 10 days. Like you, my threshold for risk was low at 25%…but I only see it as a short term bridge. If I wanted something longer than a couple weeks, I’d lean on an unused HELOC. Link to comment Share on other sites More sharing options...
BonVivant Posted July 10, 2022 Share Posted July 10, 2022 What about a HELOC on the real estate? Interest rates are low. And you can use the gains/dividends in the stocks to pay help pay the HELOC. Less risky especially with the choppy markets. Kevin Slater 1 Link to comment Share on other sites More sharing options...
+ augustus Posted July 13, 2022 Share Posted July 13, 2022 On 7/8/2022 at 3:30 PM, Kevin Slater said: Has anyone done this or otherwise have thoughts to share? Go for the mortgage. If something disastrous happens with the property, you can just walk away and let the bank repossess. With a margin loan you'd still be on the hook. BonVivant and pubic_assistance 2 Link to comment Share on other sites More sharing options...
TheBx Posted July 14, 2022 Share Posted July 14, 2022 On 7/8/2022 at 12:30 PM, Kevin Slater said: I've been wanting to pick up another rental property ever since paying off my last mortgage a few years back, but have been loathe to go through the mortgage application process again. (Last time the stethoscope practically got stuck inside my rectum.) Dawns on me I can simply take a margin loan out from my brokerage account at 5.75% (not bad these days) and come in with a cash offer. As I'd likely be borrowing less than a quarter of the value of that account I wouldn't be particularly worried about getting a margin call. I suspect I could pay the whole thing off in under three years, especially if I curtailed new stock purchases including stopping reinvesting dividends while there was still a margin balance. Apparently there's literally zero paperwork (a big plus in my book). I simply cut a check, and that portion that I don't have cash for goes against margin. Repayment is automatic: whatever cash finds its way into that account simply gets applied toward the margin balance. It looks like I can still deduct the interest (as the proceeds will go toward purchasing an investment property), but somewhat annoyingly it doesn't simply go as a business expense tied to that individual property but rather as an itemized deduction on the top line of my return. Has anyone done this or otherwise have thoughts to share? Kevin Slater If you’re a responsible, moral person you won’t go the mortgage route just so you can “walk away” if things go sour. Have you identified a property yet? I’m not seeing you talk about the price to rent ratio. That would certainly color my decision making as a point in determining how much positive cash flow you’ll have to funnel back into your account(s) if you’re sitting on investment dollars ($100k+) consider investing in a Delaware Statutory Trust. Keeps you in the RE game but in a passive investor role. A particularly good move when selling a property, doing a 1033 exchange. im divesting my RE holdings and doing that. I’m tired of being a landlord and the closer I get to retirement (2.5 years) the more I want out of the active game. Link to comment Share on other sites More sharing options...
BonVivant Posted July 14, 2022 Share Posted July 14, 2022 You also might want to wait until the current recession scenario plays out fully. Properties will become available at a discount. + Vegas_Millennial, + augustus and Quincy_7 3 Link to comment Share on other sites More sharing options...
+ Vegas_Millennial Posted July 14, 2022 Share Posted July 14, 2022 (edited) Real estate prices are at a high, stock prices are at a low. I'd be unloading real estate to buy stocks right now, not the other way around. But if it were a buyer's market for real estate, then I support your plan to partially finance the real estate purchase through your margin loan instead of a mortgage, given your circumstances and risk tolerance. Edited July 14, 2022 by Vegas_nw1982 + augustus and kingsley88 2 Link to comment Share on other sites More sharing options...
+ 5280Dane Posted July 19, 2022 Share Posted July 19, 2022 You seem to have thought this out well, but just remember the broker dealer can change the margin requirements should any of your holdings tank. Unlikely, but possible. The other risk that was mentioned above is opportunity risk, as you could miss out on a market turn around and some potential value stocks. In any case I admire your entrepreneurial spirit. Kevin Slater and + Vegas_Millennial 2 Link to comment Share on other sites More sharing options...
gallahadesquire Posted July 24, 2022 Share Posted July 24, 2022 I’ve been with a Financial Advisor / Fraternity brother for 37 years. One investment I never made was anything to do with real estate—because, as he puts it, he just doesn’t understand it. Link to comment Share on other sites More sharing options...
Kevin Slater Posted July 24, 2022 Author Share Posted July 24, 2022 8 minutes ago, gallahadesquire said: I’ve been with a Financial Advisor / Fraternity brother for 37 years. One investment I never made was anything to do with real estate—because, as he puts it, he just doesn’t understand it. Oh, the three properties I already own have done great by me. Passive income means money while I sleep, let alone any capital appreciation. It's just that they're all paid off and I want to step back up to the table (albeit without going through the painful mortgage process again). Kevin Slater BonVivant 1 Link to comment Share on other sites More sharing options...
robberbaron4u Posted August 1, 2022 Share Posted August 1, 2022 On 7/14/2022 at 10:46 AM, TheBx said: If you’re a responsible, moral person you won’t go the mortgage route just so you can “walk away” if things go sour. Have you identified a property yet? I’m not seeing you talk about the price to rent ratio. That would certainly color my decision making as a point in determining how much positive cash flow you’ll have to funnel back into your account(s) if you’re sitting on investment dollars ($100k+) consider investing in a Delaware Statutory Trust. Keeps you in the RE game but in a passive investor role. A particularly good move when selling a property, doing a 1033 exchange. im divesting my RE holdings and doing that. I’m tired of being a landlord and the closer I get to retirement (2.5 years) the more I want out of the active game. I, too, am divesting myself of rental properties. At my age, the aggravation of leasing agents, insurance premiums, property taxes, maintenance costs, etc ad infinitum is a burden I choose not to tote; however, I am investing the proceeds from the sale of my rental properties in well-managed REITs. (I do own the houses sited on either side of my principal residence and a small, low-rise office building adjacent to my property, presently leased to a small medical practice, and I will retain these particular properties as the rents they generate pay the upkeep on my home.) + Vegas_Millennial and Quincy_7 2 Link to comment Share on other sites More sharing options...
TheBx Posted August 1, 2022 Share Posted August 1, 2022 20 minutes ago, robberbaron4u said: I, too, am divesting myself of rental properties. At my age, the aggravation of leasing agents, insurance premiums, property taxes, maintenance costs, etc ad infinitum is a burden I choose not to tote; however, I am investing the proceeds from the sale of my rental properties in well-managed REITs. (I do own the houses sited on either side of my principal residence and a small, low-rise office building adjacent to my property, presently leased to a small medical practice, and I will retain these particular properties as the rents they generate pay the upkeep on my home.) Same for me. I’m investing proceeds into DSTs Link to comment Share on other sites More sharing options...
robberbaron4u Posted August 1, 2022 Share Posted August 1, 2022 6 hours ago, TheBx said: Same for me. I’m investing proceeds into DSTs Standard dividend producing "stuff" for my portfolio: Southern Company, Medical Properties Trust and the like that pay 5%+ on my investment; in my dotage, I am content to cash dividend checks and clip coupons rather than playing "spin the wheel" in the markets. Link to comment Share on other sites More sharing options...
TheBx Posted August 1, 2022 Share Posted August 1, 2022 1 hour ago, robberbaron4u said: Standard dividend producing "stuff" for my portfolio: Southern Company, Medical Properties Trust and the like that pay 5%+ on my investment; in my dotage, I am content to cash dividend checks and clip coupons rather than playing "spin the wheel" in the markets. Are your investment vehicles qualified for 1099 exchanges? Link to comment Share on other sites More sharing options...
Kevin Slater Posted August 1, 2022 Author Share Posted August 1, 2022 5 minutes ago, TheBx said: Are your investment vehicles qualified for 1099 exchanges? I would think so (they’re rental properties and I don’t know any limitations off the top of my head). But I’m happy with the units I have (two of them at least), so what’s the play there? Kevin Slater Link to comment Share on other sites More sharing options...
robberbaron4u Posted August 2, 2022 Share Posted August 2, 2022 24 minutes ago, TheBx said: Are your investment vehicles qualified for 1099 exchanges? With regard to realty, I took a planned loss, and, as a result, enjoyed a substantial tax write-off which will serve me well in the years remaining to me. The buyers fully appreciate that their "bargains" exclude them from sharing in my estate when I am delivered from this disease they call life. Unfortunately, the tax attorney who put the thing together for me is retiring from his practice to pursue his "dream" of becoming a "star" on the ballroom dancing circuit. Link to comment Share on other sites More sharing options...
Winky Posted August 5, 2022 Share Posted August 5, 2022 There should be a more direct link between debt and the asset it's financing. For example, you wouldn't take a 10-year car loan for a car that has a 5-year value life. Stocks and the real estate rental market aren't necessarily in sync. Both can have significant rises and falls, and the causes of those aren't linked (e.g. over building in an area can cause demand to drop, with no connection to how the stock market is doing. So the question is: how long will it take for rental profits to repay the margin loan, how long is the margin loan (many have a specific term, and renewal could be eat a very different interest rate), and how will that timeline change if the rental market changes? So, basically, there's more risk than just a margin call. You could be looking at a prolonged period of zero or negative profit (losses) with a decreasing ability to repay the loan. + Vegas_Millennial and + augustus 2 Link to comment Share on other sites More sharing options...
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