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Margin Loans: Low-Interest Lending or Risky Rates?

The BiggerPockets Money Podcast
29 min read
Margin Loans: Low-Interest Lending or Risky Rates?

Margin loans could be the sneakiest way to snag a low-interest rate loan in today’s Fed-influenced environment. What most investors don’t know is that you can use your stock portfolio as collateral to get massively discounted lending, but it comes with considerable risk. Carl and Mindy Jensen used this type of lending to buy their most recent real estate purchase, a medium-term rental renovation project in the same neighborhood as their primary residence.

At the time, Carl could get an interest rate so attractive that it was almost impossible to pass up. We’re talking about mortgage-sized loans with less than 2% interest! This seemed like a steal at the time, but as the market started to tank and big tech stocks like Tesla took a tumble, Carl and Mindy’s margin loan began getting hit. They faced a tough decision: either get liquidated and lose much of their stock portfolio or come up with the difference themselves.

In this episode, you’ll hear exactly how Carl and Mindy grew their stock portfolio to multiple millions in worth, the mistakes they made along the way, why they took out a margin loan, and whether or not they’d do it again. If you’ve got a sizable stock portfolio but don’t know how to get funding for your real estate deal, stick around! Margin loans could be an option for you, but you’ll need to know how to work them first.

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Listen to the Podcast Here

Read the Transcript Here

Mindy:
Welcome to the BiggerPockets Money Podcast, where Scott interviews Carl and me about our most recent real estate investment, purchased with creative financing in a changing real estate market, within a rapidly rising interest rate environment. It’ll be fun. Spoiler, it will not be fun.

Scott:
I think what I’m hearing you guys say is, look, we made a set of rationalized decisions that to us seemed very reasonable. We borrowed against the cheapest source of capital, which was this one, one and a quarter ridiculously low interest rate margin loan, and that didn’t work out in 2022. And when we talk about thinking in bets, this is a bad outcome, good decision. And this is something that you would do again, and that if you do it over the course of 10 years, nine out of 10 years, this is probably going to work out as the cheapest source of capital to use to finance a rental property in your situation, and therefore, it makes a lot of sense.

Mindy:
Hello, hello, hello. My name is Mindy Jensen. And with me, as always, is my steady hand co-host, Scott Trench.

Scott:
Thanks, Mindy. Today we’re shaking it up, as you said, and inviting Carl on the podcast, so thank you, guys, for coming on.

Carl:
Yeah. Scott, it’s good to see you again. It’s been a long time. I understand your family size has increased by 50% since last time we talked. Congratulations on that.

Mindy:
Are we jumping into the money nerd numbers already?

Scott:
By one human, we consider our cat part of the family, so it’s probably just a third, but close enough.

Carl:
What’s that noise cats make when they’re angry?

Mindy:
That’s pretty good. Scott and I are here to make financial independence less scary, less just for somebody else, to introduce you to every money story because we truly believe financial freedom is attainable for everyone, no matter when or where you’re starting.

Scott:
That’s right. Whether you want to retire early and travel the world, go on to make big time investments in assets like real estate, start your own business, or deal with the ramifications of good problems like getting 100 X returns on tech stocks and figuring out how to maximize that. We’ll help you reach your financial goals and get money out of the way so you can launch yourself towards those dreams.

Mindy:
Scott, I like that foreshadowing, so I’m going to go with what my attorney makes me say. The contents of this podcast are informational in nature and are not legal or tax advice, and neither Scott nor I, nor BiggerPockets, is engaged in the provision of legal, tax, or any other advice. You should seek your own advice from professionals advisors including lawyers and accountants, regarding the legal, tax, and financial implications of any financial decision you contemplate. And also, the stock picks that Carl and I made are not recommendations for you. If you make picks and they don’t work out, don’t come blame us. Before we start, let’s take a quick break.

Scott:
Well, let’s set this thing up and try to kind of frame the story we’re about to tell here. I’ve already kind of alluded to it in the intro there, but you guys have picked technology stocks in the past and they’ve done very, very well, incredible returns, thanks to perhaps really skillful investing, perhaps a bit of luck, and a great bull market here. I would love to hear about that story about how that came to pass, how you started investing in tech stocks and those returns. I’d love to hear about how that led up to the events of 2022, which I think are really interesting and illuminating story for us.

Mindy:
Okay. Carl, you want to talk about your massive luck, Scott said, “Maybe a little bit of luck.” I’m going to go with it was a whole big bunch of luck.

Carl:
Yeah. I think it was pretty much luck. I feel like we need a sound effect, like the way back machine because, Scott, I’m going to take you way back to 2004. And before I tell you about these couple stocks, I want to preface my story by saying I’m a big believer in index funds, well, now.

Mindy:
Now.

Carl:
But I did not know what an index fund was until 2013 and 2014. So back then, I was a computer programmer, and I was kind of obsessed with everything around that, the technology. And the first time I encountered Google, I could go full on nerd on you, but your audience does not want to hear that, I thought Google was incredible, so I’m like, “I want to invest in this company.” And it wasn’t quite public, but then I learned it would be public in August 2004, so we bought I think it was probably about $5000 worth of Google shares. And Google’s done super good, it’s done awesome. And I just continued to buy other tech companies. We bought Facebook, and that IPO’ed, I think that was around 2012, although, double-check me on that.
Another one I bought, I’m a nerd and I thought Elon Musk was cool, although that might have changed recently based on current events. But he was doing all this cool tech stuff. I’m like, “That guy’s pretty cool.” And then I saw a Tesla on the road, and I’m a car guy too, and I thought, “Damn, that’s a pretty neat car. I’m just going to take a couple thousand bucks and throw it into Tesla and see what happens,” just on a whim. I didn’t really expect that to amount to anything, but that was back in the end of 2012. And I think the split adjusted shares were 66 cents, right around there somewhere. And now they’re still, despite the things that have happened recently with the stock decline, they’re still over $100, so it’s been a fantastic return.
A couple others real quick, we have Amazon and Apple as well. And my biggest strength is just being a stubborn ass, which usually doesn’t serve you well in life, but when you hold stocks and they do well, not selling when they have an incident or wrong things happen, bad things happen, bad temporary things happen, it works out well most of the time.

Mindy:
So I think that Carl is glossing over the fact that he reads every bit of news about every one of these companies obsessively every single day. And it’s kind of difficult to get the idea of the scope of his research into all of these companies just with a quick five minute overview of his investments. But he subscribes to this newsletter and that newsletter, and he listens to every Tesla podcast all the time. And I know listeners have heard me chide him jokingly. He talks about it all the time. He’s constantly doing research and reading articles and gathering knowledge. It isn’t just, “Oh, I Googled something once, so I thought it was a cool company, so I threw some money at it.” He did a lot of research into each one of these companies before actually throwing money in there.
So I don’t think that you should never, ever, ever, ever, ever pick individual stocks, But I think that if you can’t discuss at length the corporate values and what the company does, and tons of information about that company, why do you think you should be investing in that company? If you don’t have the time to do the research, why do you think they deserve your money?

Scott:
Yeah. I just want to echo, I agree conceptually. I invest in index funds. Essentially all of my stock portfolios [inaudible 00:06:53] index funds because I do not believe that I can generate those out-sized returns. That’s not me saying I don’t believe it can’t be done. Clearly, people can do it, it just takes an elite level of commitment and an obsession, perhaps to the same level that we obsess over real estate, a lot of folks in the real estate community, perhaps even more so in the public markets with that. So Carl, [inaudible 00:07:19] to the next question. What is the next 100 bagger stock that we can invest in currently over the next eight to 10 years so we can skip all of that research?

Carl:
I just want to emphasize, even though we’ve had this, I’m going to say an important four-letter word here that’s not a bad one, but that ends in C-K, it is luck. And I just happen to be a nerd who read the right things at the wrong time. I might’ve had a little bit more insight because I could tell you all about how the dry electrode battery process works at Tesla and what advantages that gives, or maybe why Google search dominance could happen. But Tesla could be disrupted tomorrow by a solid state battery that someone comes up with, or Google might be being disrupted right now by GPT, these AI things that have sprouted up on the internet recently.
So even though I’ve got lucky, I’m very skittish. All our money is going towards index funds, and I want to make that abundantly clear. Do as I say, not as I did. Is that what dads say? That sounds like a dad thing.

Mindy:
You’re a dad.

Scott:
Hey, kid, don’t do as I … Let’s get a sense of proportion on this. So how much … Could you give us maybe a relativistic sense of the percentage of your net worth that you invested, and the percentage of your net worth that these winning tech stocks became?

Carl:
It was pretty small initially because they were small things in my post tax portfolio. Most of our investments, most of the money we put in were through 401(k) and Roths, and with those, they were mostly into some kind of fund, which I transitioned to index funds. And the main reason for that was I couldn’t invest in individual stocks because it was a company 401(k). So the amount of money we put into stocks was very small, but at its peak, it probably consumed about half of our portfolio, yeah, about 50%, and that has since changed. Cue the scary music.

Scott:
Yeah. Okay. So these small amounts of money, 5000 bucks at a time at first, maybe a little bit more as the years passed, really became hundreds, thousands, millions of dollars because of the incredible returns of these companies and a huge part of your portfolio, which has waned a little bit because the market’s come down, in particular and 2022, particularly hitting some of these winners. But it’s still 100 X return in some of these categories, 10, 20, 30 X returns on some of these individual stocks over the last 10 to 15 years.

Carl:
Yeah, that’s correct. Despite what has happened recently, we have still outperformed the index funds, which is pretty rare and I don’t think it’s repeatable. I also don’t think, to something you alluded to earlier, is it’s probably not sustainable. Every company usually goes bye-bye, and it’s very hard to predict when that tide is going to turn. I think the average length of a company now is 20.7 years. And it’s actually decreasing, so good luck even if you do pick a winner. Good luck knowing where to step off that winner.

Scott:
Well, safe to say there was a big win here, regardless of whether we missed the peak, or it’s coming back, or whatever. Who knows the future with that? Walk us through how this relates to real estate and maybe introducing some of the events in 2022.

Mindy:
Well, we were not looking for a house and a house popped up in our neighborhood, where the neighborhood that we live in is a desirable neighborhood in the city. So we knew that … And I’m a real estate agent, I’m able to run the comps easily because I have access to the MLS. And I knew that this house was at the price that we were negotiating it, it was going to be a really great buy. And we decided that we wanted to purchase this house. It’s directly next door to a friend of ours and it’s a ranch style house. Our current house is a split level and it has stairs everywhere.

Carl:
It’s got four levels.

Mindy:
Four levels of stairs. There’s just stairs all over the place, which is great if you have little kids, and not so great if you are 97 years old trying to live around your house. Our main level doesn’t have a bathroom, it doesn’t have a bedroom, so you have to use stairs to get to any of this stuff. And we decided a ranch would be much better, so we negotiated a really great price on this house and we bought it with a margin loan. And back when Tony Robinson was on the podcast, Tony Robinson is the host of The Real Estate Rookie Podcast, he casually mentioned the concept of a margin loan, and I asked him for more information about this. And I sent Carl a note, I’m like, “Do you know you can take out essentially a HELOC against your stocks?” And Carl said, “I’ve never heard of that.” He did some research and discovered that Tony was in fact telling the truth, not that I was doubting him. I had just never heard of this before.
So we gathered up all of our portfolio into one location and had the opportunity to take out a margin loan. I think our margin at the time was around $1 million. That was the amount that we could borrow, and we ended up borrowing $500,000 to buy this house.

Carl:
Actually, it was a little bit different. I want to jump back to something you alluded to. It’s a ranch, and we intend to move into this house once our kids are out in six or seven years. But yeah, we had enough margin in there, so after we borrowed the initial $500,000 to buy the house, we still had $1 million in buffer, which I thought would’ve been enough. Again, cue the scary music.

Mindy:
Oh, I thought there was only … Okay.

Carl:
Yeah.

Scott:
So you could’ve borrowed up to $1.5 million, and you borrowed $500,000 with the ability to go up another million if you needed to. Right?

Carl:
Yes. I should’ve taken a screen capture, but I believe it was right around there.

Scott:
Awesome. And what was the interest rate on this? Because Tony said there were very attractive interest rates, very, very low.

Carl:
Yeah. So Interactive Brokers is the company best known for offering these kind of arrangements, this line of credit against your portfolio. But then I called E-Trade and said, “What can you do?” And they gave me an even better rate and a lot of cash to transfer our money over there. So at the time we bought the house, it was a little bit over 1%, so we could borrow money on, I think it was 1.2% or something like that. But again, cue the scary music. That rate is variable.

Mindy:
Yeah. And it’s not variable like an adjustable rate mortgage, which goes up every … What is that? Every year. This goes up every month.

Carl:
No, every day it can change.

Mindy:
Oh. It can change every day?

Carl:
It can change every day.

Mindy:
This gets worse every time you talk. Don’t talk anymore.

Carl:
We need to have better money [inaudible 00:14:14] to discuss this stuff. I’m sorry, I feel I’m liable for not full disclosure.

Scott:
Okay, so we’re on top of the world. It’s early 2022. Stock market is … Wealth has never been higher. These big tech stocks have exploded in value over a decade and are really at incredible valuations. You’re borrowing, but it feels like an incredibly conservative amount to borrow against because … And it’s an incredibly attractive interest rate. So this all makes perfect sense. You can’t argue that any of this at this point is even somewhat irresponsible financial decision. Why are we cueing all this scary music? What happens next?

Carl:
Well, what happened next is inflation happened next, and the Fed started raising rates to combat inflation. And those rates are tied to the rate of full line of credit, and the other effect of this is when rates start going up, money flows out of growth stocks, which are mostly the tech stocks that our line of credit was against and flows into other things. So I think the S&P 500 was down 22% in 2022. But I didn’t actually check to see what the NASDAQ was down, which is mostly tech focused, but it’s down quite a bit more.

Mindy:
Tesla was down 80% if you’re keeping score. I like what you said, Scott. We were taking what we considered to be a very conservative position.

Carl:
Yeah. And the danger to a margin loan is that the money you borrow is collateralized by the money, by your investment. So if those stocks go down, each rate is eventually going to get to a position where they’re unhappy because they’ve loaned you $500,000, and then all of a sudden, your stocks are worth $550,000 or something like that. I’m just pulling numbers out of thin air here. But you have to maintain a certain amount in there, and if you don’t, they will start selling your investments whether you like it or not, and pay down your loan for you because they want to make sure they get paid back.

Mindy:
And that process, we are referring to as getting called out of our loan. So I don’t know what the actual phrase is, but we didn’t want to get called out of our loan, or have our stocks sold for us.

Scott:
So to give an example here, if I have $1 million in Tesla stocks at the beginning of the year, and I borrow against that, I could borrow up to half of that, potentially at these really attractive interest rates, so 500 grand. If Tesla stock drops 80%, now all of a sudden, I’m borrowing $500,000 against $200,000 in stock. I’m either going to be on the hook for bringing $300,000 or really, probably $400,000 to the table, so my loan is half of my stock value, which is now $200,000, $100,000, or they’re going to start selling my Tesla stock for me in order to re-collateralize that loan. And they’re going to really start doing that before I get to that point. So if it drops to $800,000, they’re going to say, “We’re going to start doing that until your margin’s $400,000,” and they’re going to do that on the way down this journey.
This is something you thought we’re going to completely avoid this risk in its entirety because we’re only borrowing one third of the value. But when Tesla goes down 80%, that creates, that begins putting this pressure on even the conservative loan you took against the portfolio. Is that a correct way of phrasing this?

Carl:
Yeah, that is exactly right. And to add pain to our pile, E-Trade and Interactive Brokers value your holdings differently, so if all this would’ve been in VTSAX, like an index fund, they would’ve allowed for a bigger line of credit, and they would not have been as aggressive with calling their money back because those investments are much less volatile than Tesla or Amazon.

Scott:
Awesome, okay. Well, not awesome, but we understand the concept here. What happens next here? What happens throughout the rest of 2022? And how do we resolve this problem that’s beginning to compound?

Carl:
Yeah. So the one thing we did do is because we’re so conservative, even though we did have a huge buffer, and this will come into the story a little bit later, we went and got a HELOC against our primary home, where I think the chances of us getting called out are so small, but I really, really don’t want to be forced to ever sell anything. So let’s get a HELOC just in case this rare, rare scenario does actually happen.

Scott:
By the way, I want to point out something else here. This is also probably scary because you have 100 X capital gains in some of these stocks. Right? And so if you had to sell those stocks, not only are you going to sell that stock and pay off the loan, you’ve also got to claim these incredible amounts of gains, which are then taxable. Right? So that puts compounding pressure on the situation as well. Right?

Mindy:
Yes. We were really, really, really anxious to not sell stocks in 2022 calendar year. So I think it was August, we went and opened up a HELOC locally, and just in case, we didn’t think we would need any of it, but we wanted to be able to pull money out of the HELOC, throw it into this loan to buy ourselves some time to think instead of having to make a snap decision because I think the way that it works is once you go below whatever the threshold is, you have three days to put the money back into the account, or they’re going to start selling your stocks. And we wanted to have more than three days to think, so we took out a HELOC. They gave us I think $108,000 against our house. And we opened the HELOC, we didn’t take any money out yet. We were just waiting.

Carl:
The one thing I was going to say about a HELOC is that can be scary too. We had a HELOC on a house when 2008 happened, and the bank actually said, “You can’t have your HELOC anymore because house prices have declined.”

Mindy:
We’re going to close it.

Carl:
Yeah, we’re going to close it whether you like it or not. So yeah, you never know what’s going to happen to your … You make backup plans for backup plans.

Scott:
So how did the situation end up resolving? We took out … Was the HELOC sufficient to cover the margin that you needed?

Carl:
Yeah. So this was a good roller coaster of a ride, but the down part in this case, most roller coasters are fun going up, going down, but with your stocks, it’s not fun going down. The up part is more fun. But yeah, Tesla really started to go bad probably towards the last quarter of the year. Elon Musk had to sell a bunch of his own shares to buy Twitter, which I don’t think he wanted to do, and his SpaceX shares. And that caused people to freak out. He also went a little off the wall on social media, and I think people lost faith in him, and the money just poured out of the stocks. And that combined with other ones as well, the big outflow of money from growth stocks, we were really, really close, and I think we have dates in our spreadsheet here. Yeah.
So on 12/22, it was getting a little bit close, so I went to the bank. I $80,000 from our HELOC over to E-Trade to make sure we wouldn’t have to sell stock. And I’m going to say something real quick, which I should’ve said before, I never like to sell stocks. I like Warren Buffett philosophy, if you do buy a stock, your holding period should be forever. And if you don’t think you should hold the stock forever, or you can’t, then you shouldn’t buy it in the first place. So the thought of having to sell stock really did not sit well with me.

Scott:
On this note, I want to just dictate for one second here. I feel like we’ve had a couple of folks who have this, I’m going to call it in air quotes, problem, where they’ve made a single investment that ends up being a huge percentage of their net worth. Right? And so it sounds like that was Tesla for you guys, or maybe some of these other tech stocks. We had a gentleman many episodes ago on the podcast, who had a condo in San Francisco he held for 15 years. And that just skyrocketed in value and became … When you have something like that, that’s the bulk or a huge percentage of your net worth, but your philosophy is index funds, because things evolved at this point, how does one think through exiting that approach? Because there’s tax ramifications, right? If you have a million bucks in Tesla stock, if you want to sell it, you’ve got to pay 200 grand in capital gains tax, rough give or take. So do you have any thoughts or advice for folks that might be struggling with that problem conceptually?

Carl:
Yeah. It’s a really good problem to have, and I have two thoughts. The first thing that’s Tesla specific, or any stock specific, is that the stock price itself is a reflection of the company, but it might not be the most accurate. There’s macro things that happen. The CEO goes off the rails occasionally. There’s recessions. If you really follow the stock, you should be following … You should never follow a stock. You should be following the business. And if you still believe in the business, who cares what the stock does in the short-term?
On the other hand, yeah, it’s a dangerous position to be in because: What’s the old famous Rumsfeld quote there? There are known knowns, and known unknowns, and there are unknown unknowns, and you don’t know what unknown, unknown is going to come out and topple you castle, or company, or stock. And you’re probably not going to see it until it’s too late. People thought Steve Ballmer laughed at the iPhone. And now where’s Windows phone? So I think if you do have a big amount, capital gains start at $84,000 in income, I would try to slowly, slowly liquidate your portfolio and maybe try to maximize capital gains, I think. And that’s a moving target too. Who knows what capital gains are going to do in the future? And if the company does go to zero, you would’ve wished you had paid those capital gains instead of holding onto the company to maximize your tax benefits.

Mindy:
But is that what we’re doing?

Carl:
We are not doing that yet. And my thinking is, we’re very fortunate. I feel so ridiculously lucky to be able to say things like I’m about to say. And that’s if any of our individual stocks or all of them went to zero, it wouldn’t change our life. It would still be great, and I’m so thankful for that, so I don’t feel the pressure that some people have. I know two people in my personal life that have 95% of their wealth tied up in Tesla, and the other 5% isn’t that much. So if you’re in a situation like that, that’s extremely dangerous. If it did go to zero, it would ruin them. But it’s all personal decision, but yeah, I’m thankful to be in a place where if this crazy thing did go to zero, it would be fine. But yeah, eventually there will come a time when we will start unloading, maybe even this year sometime, although I don’t think so. I’m still confident in the fundamentals of the company. Scott, I can tell you house about dry electrode battery technology, but I’m sure you don’t want to hear that, and nor do your listeners.

Scott:
Next time. We’ll have a BP Money special, four hour special on dry electrode batteries, featuring Carl Jensen. Thank you. Yeah, we’re looking forward to that one.

Mindy:
Yeah. I’m not able to make that recording, sorry.

Scott:
So let me ask you this question. On the margin loan concept, I thought that was really attractive when I heard Tony Robinson say it. I wonder still, in spite of hearing the story that you guys have shared, if there’s still not a use case for that product. And I would ask, maybe put yourself in the shoes of me or another investor who’s a heavy index fund investor with a large after tax brokerage position. Would you consider doing the same strategy using up to one third of your margin capability? Which is probably one fifth or one eighth of the portfolio value from a margin loan perspective to finance, to use that as kind of like a mini HELOC, even in today’s environment. Or would you really shy away from this tool altogether, given your experience?

Mindy:
I would do this again. I think that we are … It’s so hard to use the word victim because we are not victims at all, but we’re just the victims of bad timing. If we had done this two years ago, we would look like geniuses. Our margin, we also keep track of our margin. The margin spread every day. We weren’t shocked when it was all of a sudden, we needed to throw HELOC money at this because we’re checking it frequently. This is something that we want to be aware of because we don’t want to get called out. And I think that something that you need to be honest with yourself is: If this is something that you’re able to do, are you going to be checking it frequently? Are you going to have a backup plan, and a backup plan for your backup plan in case you get called out?
You have no idea what the stock market’s going to do. Just because it starts going up again doesn’t mean it’s not going to crash the next day. And we have a backup plan for our backup plan, and we’ve got the HELOC. And we have 401(k)s that we can borrow from, and we have lots of other things. We could just sell stock. We don’t want to, but we could if we had to. So I would absolutely use this again, just not right now because there’s no money left.

Carl:
Yeah. I’ve got a couple things to build on that. Despite our tale of woe, if you can even call it that, our rate of borrowing now is 5.5%, and that’s still jarring. It went from 1.2% to 5.5%, but we couldn’t even get a conventional primary home mortgage for 5.5%, so it’s still a great rate, historically speaking. The second thing I’ll say is margin loans are fast. You can press a button and have access to, in our case, $500,000 the very next day, so if you see a deal that you need to pounce on there’s an advantage to coming up with cash, you can have this, and you can have it quick. And I think that’s why we got such a great deal on our property. We’re like, “Hey, we can close next week if you want,” as soon as title comes back, boom, we are done. And you could use this as a temporary thing too. Do the margin to buy a house or whatever investment it is, and then just pay that off and switch back to a conventional loan, or sell stocks, or whatever. So I would absolutely use it, it’s a great tool.
The last thing I’m going to say is, a BiggerPockets Money listener actually got in contact with me after the first time we talked about this, and there are strategies to mitigate this, especially if you’re on Interactive Brokers. I can send you a link if y’all do show notes, and you can put into that. But if I was on that, I didn’t even understand what this guy was talking about. It’s pretty sophisticated, but Big ERN, Early Retirement Now, is hyper smart about this. So if I were going to do this, I would look at his blog post about how to mitigate some of that risk.

Scott:
Okay, great. We’ll link to that at the show notes at biggerpockets.com/moneyshow376. I think what I’m hearing you guys say is, look, we made a set of rationalized decisions that to us seemed very reasonable, very probability weighted, very, very thoughtful throughout this situation. And we borrowed against the cheapest source of capital, which was this one, one and a quarter, ridiculously low interest rate margin loan, we thought with a degree of safety. We also had other pools of emergency last resort capital if we needed to get that from our house, for example. And that didn’t work out in 2022. And when we talk about Thinking in Bets, that’s one of my favorite books by Annie Duke. This is a Thinking in Bets exercise. This is a bad outcome, good decision.
And this is something that you would do again, and that if you do it over the course of 10 years, nine out of 10 years, this is probably going to work out as the cheapest source of capital to use to finance a rental property in your situation. And therefore, it makes a lot of sense. But once every while, you have to know when you’re playing poker, someone’s going to have that better hand, even if you are betting correctly on that, and you have to have your way out so that it doesn’t actually … Because you can’t play a game where you’re going to go BK once every 10 years, even if it is mathematically probable to get rich. You didn’t do that. You had your backup plans, and that’s what I’m hearing you say is, yeah, absolutely, we’d do this again. Just a little bit of bad luck this year in 2022. We were able to move through it and it’s still a great tool. Does not disprove the use of the tool. Is that a good way to phrase it?

Carl:
Yeah. That’s exactly right. There’s a good John Maynard Keynes quote that I always think about in time like this, and it goes, “The stock market could stay irrational longer than you can stay solvent,” and yeah, I never thought that would apply to me.

Scott:
Awesome. So has your strategy for the property that you bought changed at all as a result of this? Do you think you’re going to still hold it as a rental?

Carl:
Yeah. It lit a fire under our butts to get it done sooner than later, so it started to generate an income instead of taking all of our current income to have money to it. Our scope did expand a little bit due to issues we found with the house and a couple other things. But yeah, I think we’re still going to do the exact same thing, just I’m going to get over there right after I’m done with this. I’m going to be working, air compressor, nail gun. Scott, if you’re not doing anything, if you want to come up, learn some home improvement.

Scott:
We’ll do that at the same time as we record that four hour dry battery podcast here.

Mindy:
Oh, yeah. You guys could talk about the dry batteries while you’re working on the house.

Scott:
That sounds wonderful. It sounds like it doesn’t change anything. And maybe a lesson there to learn as well is if you are able to get a really attractive source of financing for a property, but there’s a variable interest rate, or it’s a nontraditional source of financing, maybe you should still run the numbers on that property with more traditional rates at the rates maybe current 30-year mortgages with a little bit of a buffer. Make sure it still cash flows in case there is an issue that requires you to rearrange your financing because that may change the return profile. And it sounds like in this case, it still works, even with the higher rates.

Mindy:
It does. It just doesn’t work as well. But some of the advice that I see in the BiggerPockets forums over and over and over again is have multiple exit strategies, and we did. We had the plan is to have this as a medium term rental because the neighborhood doesn’t allow for short-term rentals. Have it as a medium term rental until our kids move out of the house, and then we will move into it because it’s a better retirement house than our current house. We could sell it. We could turn it into a long-term rental. This neighborhood commands good rent rates, so even a long-term rental would make sense. Short-term rental is out. It’s a flip. We could sell it just outright if we decided that we get to the end of it and it doesn’t work out, we can just sell it. There are three exit strategies, and we’re going to move into it. We could technically move into it. It doesn’t quite fit our family. It’s a smaller house than what we have now. But if we had to, we could move into it as well, and then sell this house.

Carl:
And Scott, I’m just saying, Longmont is a wonderful place to raise a family, especially one kid, one cat families, if you would …

Scott:
Are there any babysitters available in Longmont?

Mindy:
Oh, conveniently enough, yes.

Scott:
Awesome.

Mindy:
I live with two.

Scott:
Longmont’s a wonderful place, so one day on that. And on a half serious, half light hearted note, Carl, I am kind of curious about the batteries that Tesla produces. Is there a good resource we could link to in the show notes there for folks to learn more about that?

Carl:
I’ll think of a good one and send it to you in the show notes. There’s a podcast called Tesla Daily. Rob Maurer is awesome. Yeah, he goes all over it. I think that recording might be four hours long, but if you’re really into it, he makes the bull case for Tesla.

Scott:
Perfect. I can just imagine me listening to that while patching the drywall at the new property.

Carl:
It’s absolutely riveting, to me at least.

Scott:
That was a great pun. That was a fantastic one. Anyways, Mindy and Carl, thank you very much for coming on the BiggerPockets Money Podcast. Is there anything else that you want to share about the story before we conclude?

Mindy:
I want people to know that they should be extremely conservative when they’re doing financial monkey business like this. What we did was absolutely legal, but there are elevated risks with this elevated level of financial monkey business I guess is the really great way to phrase this. So be conservative. If we would have taken out the entire margin, we would be hosed. We would’ve been selling stocks a long time ago. Have backup plans for your backup plans, and maybe a third backup plan. If you don’t have to use them, great. You just had an exercise in creative thinking. If you have to use them, you’re going to be so thankful that you were able to think about it calmly, as opposed to, oh my goodness, I’m in a panic, I have to do something. Let me react instantly. That’s never when you’re making your best decisions.

Carl:
And Scott, I’m just curious. What is your cat’s name?

Scott:
Cat’s name is Fred.

Carl:
Fred, okay.

Scott:
Fred has made a handful of appearances on the BiggerPockets Money Podcast when I have to record from home for various reasons.

Carl:
Nice. Yeah. Our situation didn’t turn out exactly how I thought it would be. It’s a lot different. But my worst case scenario, having to sell stocks, hasn’t happened. That doesn’t mean it won’t happen yet. By the way, our buffer with the margin loan, I checked it before this recording, it is back up to almost $200,000. But the thing is, it doesn’t matter what the average of it over the six months of it was, it matters what it is on a very specific point in time. And yeah, that’s the hard part. Over the long-term, it’ll be okay.

Scott:
Are you repaying the margin loan at this point? Is that a personal finance priority?

Carl:
Nope. After we get the house rented though, every dime from that sucker’s going to go right back into the margin loan.

Scott:
Yeah. That is one thing I’ll call out, actually before we conclude is when you take out a margin loan or a HELOC, I think you should think about it as a short-term debt. I like to think about it as, if you’re thinking about this as a five year or longer loan, something’s wrong in my opinion. So that means if you take out 60 grand on a margin loan or HELOC, you need to be thinking about not just the interest you’re paying, but $1000 a month, 60 months, over five years, $1000 a month that you’re repaying to that principle balance. So if you buy a rental property, for example, with let’s say you bought this property for $500,000 with a $380,000 mortgage, a cash flow is 500 bucks after that mortgage, but you also used a margin loan. Even if that margin loan was at 0% interest for 120 grand, you’ve got to pay back two grand a month. So this property’s going to suck $1500 out of your life every month, in that case with both those sets of financing, for the next five years.
And this is where people get themselves into trouble with these short-term financing instruments, buying long-term investment properties. You’re not going to have that problem because you only used this one loan to buy the whole property with that. But that’s something that you want to think about as a listener if you’re thinking about financing properties with two types of debt, a long-term debt and a short-term debt, because that interest rate’s going to deceive you into thinking it’s great financing, but it’s really going to create a tremendous amount of pressure on you for several years.

Mindy:
Yeah. I can see somebody taking it out, taking HELOC out, and then since that’s against their personal house, they’re paying it back with their personal money. You should be paying that back with your rental money. And if your rental money can’t cover that, then is it really worth buying that rental property?

Scott:
Yeah. I think investing should de-stress your life with each incremental asset, not put compounding pressure on you until you reach these break points three to five years out.

Mindy:
Wow. Do you feel seen?

Carl:
I should’ve talked to Scott eight months ago.

Scott:
Well, great. Well, guys, thank you so much for coming on the BP Money Show. This was wonderful, and really, really appreciate it and hope to have you back to discuss a big winner next time, next year. Let’s do that. That sounds great.

Mindy:
Thanks for having us, Scott. We had a great time on the BiggerPockets Money Podcast.

Carl:
Thank you, Scott. Please say hi to Fred for me.

Scott:
We will. We will certainly do that.

Mindy:
And kiss your baby for me.

Scott:
Always.

Mindy:
BiggerPockets money was created by Mindy Jensen and Scott Trench, produced by Caitlin Bennett, editing by Exodus Media, copywriting by Nate Weintraub. Lastly, a big thank you to the BiggerPockets team for making this show possible.

 

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In This Episode We Cover

  • Margin loans explained and the risk that comes with a low-interest rate loan 
  • Investing in tech stocks and whether or not they’re worth it now that stock valuations are down
  • Index fund investing and why single stock-picking may be riskier than you think
  • What getting a “margin call” means, and what to do when your stock values drop
  • HELOCs (home equity lines of credit) and using them as a safety net for paying off debt
  • Carl and Mindy’s new medium-term rental and whether the headache was worth the new house
  • And So Much More!

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.