Securities-Based Borrowing to invest in Real Estate

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grf1973

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Hi people,


I've been thinking about the following for a while: Let's say you have 200K in financial assets, like ETFs, bonds and individual stocks.
Would a bank give you a loan of, say, 150K using those assets as collateral so you can then buy a property to let?

The idea is to acquire an income producing asset with no money out of your pocket.

Is this feasible? Have any of you done this before?

Thanks in advance for your thoughts.
Gabriel.
 
Central Bank rules impose a 70% LTV limit for BTL loans, with limited exceptions.

In any event, it wouldn't make any sense to hold bonds yielding <1% while borrowing at >5%.
 
Some private banks offer the type of lending you are describing. It’s essentially a portfolio loan. I’ve seen circa 30% LTV offered against single stock positions, and up to 75% offered against managed portfolios. The rates tend to be in the 1% to 2.5% range.
 
Thank guys for your reply.
So, you still have to make a 30% down payment, right? In that sense it's like any other mortgage so there's no advantage in doing this, is that correct?
The borrowing interest compared to bond yields don't matter (I think) as the idea is the property pays itself with the rent.

Gabriel.
 
No, typically a 70% downpayment for single stock exposure.

Sarenco’s point is well made; if you’re borrowing against stock/bonds, you also need to look at the return from those investments; put simply, there is no point keeping an investment that’s yielding 1.5% to borrow against it at 2%.
 
Ok, the down payment argument makes the whole exercise futile. You better get a usual mortgage.

But I still don’t get the yielding point: If you cover the monthly payments with the rent (ideally), what’s the relevance of the borrowing interest?
Sorry for my ignorance, I may be missing some basic stuff here.


Thanks,

Gabriel.
 
grf1973 said:
But I still don’t get the yielding point: If you cover the monthly payments with the rent (ideally), what’s the relevance of the borrowing interest?
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Because you could just liquidate the low yielding asset, use the proceeds to partly finance the property purchase and therefore borrow less money at the higher rate. The rent will be the same regardless.
 
Ooook! Got it! Thanks.

If you don’t mind, I will “borrow” more of your time. I like to use hypothetical examples to clarify my ideas.

Let’s say you have 300K in an ETF that replicates the S&P500, so you roughly expect to get around 9% annual return in the long run (on average).
In that case, you would be able to get a 90K loan from the bank (30% of the ETF value) probably at 2-3% interest rate. Is this correct?
Then, you can just buy a 90k property and repay the loan with the rent. Again, is this correct?

Of course you could buy 3 properties like that with your 300k in the first place, but the point is: when the loan is fully paid (perhaps in 25 years), you basically have created 90K in assets out of thin air while getting 9% annual return from your ETF during the process.


Does all of this make any sense?
Gabriel.
 
OP, just to confirm, are you based in Ireland?

grf1973 said:
Have any of you done this before?
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Welcome to 2006!

grf1973 said:
Of course you could buy 3 properties like that with your 300k in the first place, but the point is: when the loan is fully paid (perhaps in 25 years), you basically have created 90K in assets out of thin air while getting 9% annual return from your ETF during the process.
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What you're doing is magnifying your risk. Say you buy 3 properties, with down payment secured against existing portfolio. A 20% fall in property values, and 20% drop in shares, you've completely wiped out your entire savings. So yes, on a good run you'll quickly grow your net worth, but you've taken on all the risk of things going wrong.

A small increase in interest rates, a vacant period, a tenant not paying rent, or a property requiring investment all require your cash from other sources to fund, or could force you to have to sell one of the investments to keep the others.
 
grf1973 said:
Let’s say you have 300K in an ETF that replicates the S&P500, so you roughly expect to get around 9% annual return in the long run (on average).

Gabriel.
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9% ??

More like 6 to 7 %, before charges, I would think. And that is based on past performance, there is good reason to believe that given the low interest rates over recent years, that returns may be lower in coming years.
 
: All we have is past performance to work with. In the future it could be less or it could be more, it doesn’t really matter what we expect or what we think it is likely to happen. The figure I used was only an example.


: Yes, I’m based in Ireland even though I come from Spain. Why?

When you leverage your investment you are always magnifying your risk and potential gains, those are the rules of the game. I think real estate investors (which I am not) are used to deal with leveraged investments and never really think about a 20% fall in the value of their properties (or long vacant periods, big repairs, etc). When they get a regular mortgage they are facing the same risk: a 10% drop means a 100% loss of their initial investment, but that’s fine because the property is still there, physically. It feels less risky.

 
grf1973 said:
When you leverage your investment you are always magnifying your risk and potential gains, those are the rules of the game. I think real estate investors (which I am not) are used to deal with leveraged investments and never really think about a 20% fall in the value of their properties (or long vacant periods, big repairs, etc). When they get a regular mortgage they are facing the same risk: a 10% drop means a 100% loss of their initial investment, but that’s fine because the property is still there, physically. It feels less risky.
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This is exactly the flawed logic that fueled the bubble
 
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