Using Margin Loans for Real Estate Investing
Author: Haydn Zeis, January 17, 2020
In this article, I’m going to outline how you can use margin loans to buy and invest in real estate. We have had savvy investors utilize margin loans to take advantage of historically low interest rates to place cash with our investment fund. I co-founded a real estate investment company named Lonicera Real Estate Investments that’s on track to have $20,000,000.00 of controlled assets by the end of the first quarter of 2020. We focus on diversifying people’s portfolios with real estate and help them own cash-flowing assets, with my partners and me. We take on managing the property, so they don’t have to deal with the headaches of being a landlord.
So, let’s dig in! Margin loans can be tricky and should only be utilized by experienced investors, make sure to speak with your financial advisor and CPA to understand the risks and benefits of using a margin loan.
A margin loan is one backed by the borrower’s security investments. Like a HELOC (Home Equity Line of Credit), where your line of credit is backed by the equity in your home. Most of the time, brokerage firms will allow you to use up to 50% of your portfolio’s value.
Margin loans can be good tools for investing in real estate. Borrowers can utilize money they’ve already saved to get a higher ROI on that capital, while diversifying their portfolio at the same time. The benefits include quick access to cash, no closing costs, no property appraisal, no monthly interest payments (although interest does accrue), higher ROI on cash already saved in your portfolio, and diversification.
To illustrate how margin loans can increase your overall return, here’s an simple example. Say you have $1,000,000 in your security portfolio that’s producing a 6% rate of return. You could expect your account to grow to $60,000 in a year.
You decide to use a margin loan and borrow $500,000 at an interest rate of 3%. Which costs you $15,000 for the course of the year.
The real estate opportunity you’re seeking has averaged a cash on cash return of 8%, so invest your $500,000 margin loan. You can expect a return of $40,000 in a year.
The total return between your securities and real estate end up being $100,000 and with the cost of the margin loan being $15,000, this means you increased your cash on cash return on your initial $1,000,000 from $60,000 or 6% to $85,000 or 8.5%.
What this example doesn’t illustrate is the appreciation of the real estate and value of your stocks increasing, which would make your total ROI, much higher.
Using a margin loan for long term investing should only be done by sophisticated investors who have the wherewithal to stand a downturn in the economy or volatility in the market and consistently monitor their portfolio. Although, most custodians will allow you to take 50% of the account value of marginable securities, typically your loan balance can reach around 70% of the accounts value. Once you reach this threshold, the custodian will start a margin call that will require you to reduce the debt your using. The biggest reason for a margin call is the decreased value of the stock portfolio due to a downturn.
Some of the best uses for long term margin loan investing is a passive real estate investment funds or syndications and active buy and hold investment property.
If you’re a beginner to margin loans, short term investing is likely the best option for you. Some of the ways you can use the margin loan short term is for fix and flips, BRRR method, and buy and holds while you secure traditional long-term financing to name a few.
It’s extremely important to weigh and understand the risks before investing using margin loans. Though, with careful consideration and direction from your financial advisor and CPA, using margin loans can greatly increase your buying power for long-term and short-term real estate investors.
Haydn Zeis - Principal
Lonicera Management, LLC
January 17, 2020