All done and living off rental income

[SAtoUS]

Good topic. Any comments regarding using portfolio margin instead of mortgages? I paid off my home loan a few years ago, same with my rental. I'll never have another home loan again and probably not against my rental. My Interactive Brokers rate is ~1.75%, my eTrade is 3% and I can borrow against mutual funds in this account. I only borrow <20% max of the portfolio value (~10% currently).

That is an insane rate, wow. Here's the breakdown from Schwab.

Debit Balance Margin Rate Effective Rate

$0-$24,999.99 Base Rate + 2.00% 8.50%
$25,000-$49,999.99 Base Rate + 1.50% 8.00%
$50,000-$99,999.99 Base Rate + 0.50% 7.00%
$100,000-$249,999.99 Base Rate + 0.375% 6.875%
$250,000-$999,999.99 Rate + 0.25% 6.75%
$1,000,000-$2,499,999.99 Base Rate - 0.25% 6.25%
$2,500,000+ Base Rate - 0.50% 6.00%



I will NOT use my margin instead of a mortgage. What if another 9/11 happens? What if another bank fiasco happens? Nope, not I... I sleep well at night

 

[DSC800]

I will NOT use my margin instead of a mortgage. What if another 9/11 happens? What if another bank fiasco happens? Nope, not I... I sleep well at night

I understand the aversion to margin, but I don't think it is fully warranted. Another 9/11 or deep recession will still result in both mortgage defaults and margin calls. Properly managed, using margin is actually risk adverse. Even at 100% margin, the portfolio would need to decline 70% before my first margin call. Would I rather loose my house or my stocks? Personally, I don't margin more than 20% and with my conservative dividend portfolio I consider risk to be near zero. Btw, the rich generally don't do mortgages of any kind on homes or especially 2nd homes. They simply write a check against their portfolio and get to write off all the low interest (although I did read that Zuckerberg has a $6MM mortgage, but I don't know why).

Regarding Schwab, those should be their published rates. I went to IB specifically for their great rates. When I told eTrade I was going to move money they reduced their rate from 8% to 3% immediately AND, they actually margin against mutual funds (not many do).

 

[SAtoUS]

I understand the aversion to margin, but I don't think it is fully warranted. Another 9/11 or deep recession will still result in both mortgage defaults and margin calls. Properly managed, using margin is actually risk adverse. Even at 100% margin, the portfolio would need to decline 70% before my first margin call. Would I rather loose my house or my stocks? Personally, I don't margin more than 20% and with my conservative dividend portfolio I consider risk to be near zero. Btw, the rich generally don't do mortgages of any kind on homes or especially 2nd homes. They simply write a check against their portfolio and get to write off all the low interest (although I did read that Zuckerberg has a $6MM mortgage, but I don't know why).

Regarding Schwab, those should be their published rates. I went to IB specifically for their great rates. When I told eTrade I was going to move money they reduced their rate from 8% to 3% immediately AND, they actually margin against mutual funds (not many do).

I know, I have a few friends in the $10m club, they're doing / telling me the same thing.

As for the rates, that's a HUGE difference in interest. Maybe I should call around. I've been w Schwab for 18 years.

 

[RunningBum]

Btw, the rich generally don't do mortgages of any kind on homes or especially 2nd homes. They simply write a check against their portfolio and get to write off all the low interest

I don't follow. If they don't do mortgages, what is all this low interest they are writing off?

 

[DSC800]

I don't follow. If they don't do mortgages, what is all this low interest they are writing off?

The mortgage interest deduction is limited to a maximum of $1.1MM total debt on a first or second home. Margin interest is unlimited and less time and paperwork.

 

[Senator]

Good topic. Any comments regarding using portfolio margin instead of mortgages? I paid off my home loan a few years ago, same with my rental. I'll never have another home loan again and probably not against my rental. My Interactive Brokers rate is ~1.75%, my eTrade is 3% and I can borrow against mutual funds in this account. I only borrow <20% max of the portfolio value (~10% currently).

I know there is a risk of margin a loan becoming called due. If the portfolio drops it can happen, I am not sure if there are other reasons. A margin loan is generally short term.

I pay off my rentals and because of this, my cash flow is incredibly good. I am working on another to be paid off by year end, which will retire a 5.375% mortgage and will give me another $960 a month in cash flow (P&I).

I view it as a guaranteed 5.375% bond, albeit a bit less liquid. Between mortgages paid off in the past two years, and rent increases, my cash flow is an extra $100K+ per year.

 

[Fedup]

It's a dangerous game, margin that is. My mortgage rate is 3.5%, could be lower if I went shorter term.


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[ER604me]

FWIW, this is *very* similar to our NW, and our AA will mirror this very closely after we pay off the next mortgage (sitting on the cash for a few months to make sure that's what we want to do with it.) The real estate portfolio is also exactly why we don't have a bond allocation.

+1. We have 1.2M in RE with 180k mortgage left. It's about 50% of our NW. We also consider the RE portion as a bond.

 

[DSC800]

I know there is a risk of margin a loan becoming called due. If the portfolio drops it can happen, I am not sure if there are other reasons. A margin loan is generally short term.

I think if you were to buy, say, TSLA on margin, or any single stock, that would be very risky. I'm talking about a 20% margin position against my specific portfolio of conservative dividend payers, like KHC, O, JNJ, PCK*, DVY, HDV, etc (I hold about a dozen ETF's, REITs, BDCs and tax frees). Basically replacing my ~$200k mortgage at a rate half as much to enhance my dividend income.

There is near zero risk of a call with portfolio margin. Market would need to go down +80% in my case. Mortgages can be called too (foreclosure). It's not short term, it is a low, variable rate, effectively a credit line as long as you want.

Not selling margin to anyone, just presenting ideas.

 

[calmloki]

I think if you were to buy, say, TSLA on margin, or any single stock, that would be very risky. I'm talking about a 20% margin position against my specific portfolio of conservative dividend payers, like KHC, O, JNJ, PCK*, DVY, HDV, etc (I hold about a dozen ETF's, REITs, BDCs and tax frees). Basically replacing my ~$200k mortgage at a rate half as much to enhance my dividend income.

There is near zero risk of a call with portfolio margin. Market would need to go down +80% in my case. Mortgages can be called too (foreclosure). It's not short term, it is a low, variable rate, effectively a credit line as long as you want.

Not selling margin to anyone, just presenting ideas.

So I get all excited when hearing about saving on interest rates - heck, Penfed is charging us 3% on a 5/5 adjustable. Not familiar with margin borrowing, so I Googled:

Vanguard Margin Interest Rates 2016

6% for loans in the $100k-$500k range? What am I missing?

 

[RunningBum]

I don't think mortgages can be called. Your house can be foreclosed on if you fail to keep up with mortgage payments, but they won't foreclose just because the market value of the house has dropped.

You can do what you want. You can promote what you want. But don't mislead people with falsehoods.

 

[Senator]

So I get all excited when hearing about saving on interest rates - heck, Penfed is charging us 3% on a 5/5 adjustable. Not familiar with margin borrowing, so I Googled:

Vanguard Margin Interest Rates 2016

6% for loans in the $100k-$500k range? What am I missing?

I believe Interactive Brokers is quite a bit less, under 2%.

https://www.interactivebrokers.com/en/index.php?f=1340

I have been known to use a HELOC to pay off a rental mortgage, or buy a rental outright. I then quickly pay off the HELOC. I am likely going to finish off a rental mortgage at year end with my HELOC, if I do not get it paid off by then.

Partially paying off a rental does little good. Cash flow doesn't change, the monthly payments are the same, and the interest paid deduction is smaller, so you pay more taxes.

 

[JohnnyBGoode]

Interesting discussion on RE options, but it really does depend on where you live (assuming you want/need to see the property regularly). Living here in the Bay Area (Northern CA) the real estate market is so hot that even distressed properties are snapped up in a jiffy and there are precious few "bargains" to be found.

In my situation I'm thinking of dabbling more in REITs or in a service like PeerStreet. Seems like a relatively easy way to get in the market. Any thoughts on that?

 

[DSC800]

I don't think mortgages can be called. Your house can be foreclosed on if you fail to keep up with mortgage payments, but they won't foreclose just because the market value of the house has dropped.

You can do what you want. You can promote what you want. But don't mislead people with falsehoods.

Please, a loose comparison and you are correct. You can pay your margin and keep your stock, you can pay your mortgage and keep your house. Not misleading anyone and certainly not promoting anything (how could I be?). The rich use margin to their advantage, very low rates and easy to tap. I use a little and as my wealth grows I'll use a little more, but with caution. Although I don't have a mortgage, I do have a heloc if needed.

 

[foxfirev5]

Interesting discussion on RE options, but it really does depend on where you live (assuming you want/need to see the property regularly). Living here in the Bay Area (Northern CA) the real estate market is so hot that even distressed properties are snapped up in a jiffy and there are precious few "bargains" to be found.

In my situation I'm thinking of dabbling more in REITs or in a service like PeerStreet. Seems like a relatively easy way to get in the market. Any thoughts on that?

The REIT route is what I've taken on a small scale. Having dealt with the direct ownership route I really don't see what that would have to do with ER. Periods of relative inactivity followed by PITA hassles that far exceeded those in the everyday workplace.
IMHO peerstreet looks like a bunch of kids trying to work an angle. To each his own/

 

[DSC800]

So I get all excited when hearing about saving on interest rates - heck, Penfed is charging us 3% on a 5/5 adjustable. Not familiar with margin borrowing, so I Googled:

Vanguard Margin Interest Rates 2016

6% for loans in the $100k-$500k range? What am I missing?

Well don't run out and load up on margin based on my posts, but eTrade is a flat 3 or 3.25% for a Platinum account and Interactive Brokers is under 2% even for <$100k. They can change rates at anytime, but they generally follow a benchmark+, like the fed funds rate.

 

[JohnnyBGoode]

The REIT route is what I've taken on a small scale. Having dealt with the direct ownership route I really don't see what that would have to do with ER. Periods of relative inactivity followed by PITA hassles that far exceeded those in the everyday workplace.
IMHO peerstreet looks like a bunch of kids trying to work an angle. To each his own/

Thanks! PeerStreet was recommended by Mr Money Mustache, one of my favorites, so I was treating it more seriously than most. But overall REITs seem like a better way to go. I agree direct ownership could be a lot of work but if you like spending your time that way it all works out.

 

[RunningBum]

Please, a loose comparison and you are correct. You can pay your margin and keep your stock, you can pay your mortgage and keep your house. Not misleading anyone and certainly not promoting anything (how could I be?). The rich use margin to their advantage, very low rates and easy to tap. I use a little and as my wealth grows I'll use a little more, but with caution. Although I don't have a mortgage, I do have a heloc if needed.

Even a loose comparison between the two is inaccurate. Mortgage payments are predictable and scheduled. A margin call can come suddenly and has to be satisfied immediately, and if you are offline and cannot act, your broker will sell whatever they choose. This happened to a co-worker of mine, years ago. He was out of the country and they sold the holding he least wanted to get rid of, just before it bounced back and he missed out.

But assuming you are correct about low rates, I agree accessing extra money via margin is a lot easier than a mortgage, and with no extra fees. Do "the rich" actually use margin regularly? I don't know, but I'd be surprised if that's generally true. I could be wrong. I still remember the dotcom bubble burst, and Black Monday of 1987, so it's not for me.

 

[DSC800]

Even a loose comparison between the two is inaccurate. Mortgage payments are predictable and scheduled. A margin call can come suddenly and has to be satisfied immediately, and if you are offline and cannot act, your broker will sell whatever they choose. This happened to a co-worker of mine, years ago. He was out of the country and they sold the holding he least wanted to get rid of, just before it bounced back and he missed out.

But assuming you are correct about low rates, I agree accessing extra money via margin is a lot easier than a mortgage, and with no extra fees. Do "the rich" actually use margin regularly? I don't know, but I'd be surprised if that's generally true. I could be wrong. I still remember the dotcom bubble burst, and Black Monday of 1987, so it's not for me.

Disagree, a loose comparison to me is a choice of collateral/debt, and borrowing on margin is a preferred substitute for a variable mortgage because of the flexibility, low rates and penny one tax write off. And, if you read my posts, there is near zero chance of a margin call. The reits, bond funds, preferred, bdc's and dividend payers would need to decline 70% on the whole portfolio if I was fully margined, but I'm not, I personally only borrow 20% max. It would take a >90% decline with (real) blood in the streets for a call.

 

[robertf57]

Having never borrowed on my equities, I am unfamiliar with the real workings of margin loans; but, I can't believe that I can borrow hundreds of thousands of dollars from a brokerage at a fixed rate for 10-30 years...... Can someone enlighten me if this actually is possible.


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[DSC800]

Having never borrowed on my equities, I am unfamiliar with the real workings of margin loans; but, I can't believe that I can borrow hundreds of thousands of dollars from a brokerage at a fixed rate for 10-30 years...... Can someone enlighten me if this actually is possible

No, it is not possible to borrow at a fixed rate. It is always a variable rate. If rates go up fast, so will the margin interest rate. Also, research "portfolio margin", a must, so no single security would be the measure of risk (margin call).

 

[robertf57]

No, it is not possible to borrow at a fixed rate. It is always a variable rate. If rates go up fast, so will the margin interest rate. Also, research "portfolio margin", a must, so no single security would be the measure of risk (margin call).

Thanks. So this whole thread seems a bit bizarre. I certainly would not borrow using a totally variable note with absolutely no controls on increases in rates for a percent or two on a piece of real estate I will be holding for a period of time. Too risky for me!


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[DSC800]

Thanks. So this whole thread seems a bit bizarre. I certainly would not borrow using a totally variable note with absolutely no controls on increases in rates for a percent or two on a piece of real estate I will be holding for a period of time. Too risky for me!

agree 100%

 

[ER604me]

I believe Interactive Brokers is quite a bit less, under 2%.

https://www.interactivebrokers.com/en/index.php?f=1340

I have been known to use a HELOC to pay off a rental mortgage, or buy a rental outright. I then quickly pay off the HELOC. I am likely going to finish off a rental mortgage at year end with my HELOC, if I do not get it paid off by then.

Partially paying off a rental does little good. Cash flow doesn't change, the monthly payments are the same, and the interest paid deduction is smaller, so you pay more taxes.

I agree with Senator on this. We currently have a HELOC with 1.99% for one year and I intend to pay it off within a year so all our properties are mortgage free. My accountant says that all the expenses and interest for the loan are deductible as a business expenses. We are also making all long term repairs/maintenance now while my earnings are high so that we have low expenses on the rentals when I retire.

 

[jkern]

Interesting discussion on RE options, but it really does depend on where you live (assuming you want/need to see the property regularly). Living here in the Bay Area (Northern CA) the real estate market is so hot that even distressed properties are snapped up in a jiffy and there are precious few "bargains" to be found.

In my situation I'm thinking of dabbling more in REITs or in a service like PeerStreet. Seems like a relatively easy way to get in the market. Any thoughts on that?

I live in the Bay Area (Castro Valley) too and I agree with you that the bargains are virtually non existent. You can still make money the old fashioned way; buy, rent and hold over long periods of time. It has worked for me.