Securities Backed Line of Credit (Pledged Asset Line)

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Securities Backed Line of Credit (Pledged Asset Line)

Kyle Collette
Investor · Columbus, OH · Member since 2016 · 112 posts · 79 votes

Hey BP Community,

Question for you all: Looking to open a Line of Credit (called a Pledged Asset Line by Charles Schwab) against my brokerage investment accounts. Does anyone have any experience with this? I opened a HELOC early last year and was wondering how the process is different.

I spoke with Charles Schwab yesterday and got an overall view, but wanted to check to see if anyone has had any experience (positive or negative) doing this.

The plan is to use the PAL to make "cash" purchases and then immediately refinance (using delayed financing).

Any advice/insight is appreciated!

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Mark B.
Colonia, NJ · Member since 2016 · 22 posts · 29 votes
9y

@Michael McKay Very cool, I'm curious to hear more about this. I actually posted about this the other day and didn't get much of a response. Figured it was more of a niche method than most of the usual ones. But I'm in a similar spot to you that I have a Morgan Stanley 401K/IRA account with significant investment in it and I was hoping to leverage that to use for BRRRR purposes some time in the near future. Though someone when I posted said that unlike a HELOC or HML you would not be able to write off the interest paid on the loan since the collateral guaranteeing the loan is not a physical property. I haven't checked with my CPA to confirm or deny but I've seen some conjecture on that point but more than likely it seems like it's true and that would be one detriment to using this method versus the others. Would love to hear your perspective of how you set it up, how long it took, the logic behind what percentage of your holdings they'll offer you as a line, etc. 50% was lower than I'd read about, it seemed more in line with 60-75% depending on the types of holdings I believe. Let me know how the process has gone so far for you and if there are any snags to look out for. Totally agree on giving yourself significant pad to prevent the loan getting called should a significant drop happen. Any notes or perspective would be much appreciative. Thanks!

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  • Larry Flanagan
    Investor · Midwest, USA · Member since 2012 · 204 posts · 33 votes
    9y

    What is the rate on the LOC?

    What happens to the LOC if the stock market crashes while you have money borrowed against it?

    0Reply
  • Malcolm Douglas
    Investor · Chicago, IL · Member since 2016 · 39 posts · 33 votes
    9y
    Originally posted by @Larry Flanagan:

    What is the rate on the LOC?

    What happens to the LOC if the stock market crashes while you have money borrowed against it?

    Yeah I would be very careful about this and make sure you understand the consequences should your stocks (collateral) decrease in value enough where they meet a margin requirement, or become less than the LOC itself, you could see the loan called at an inopportune moment.

    Is there a reason you don't want to liquidate the holdings and simply use cash?

    0Reply
  • Kyle Collette
    OP
    Investor · Columbus, OH · Member since 2016 · 112 posts · 79 votes
    9y

    @Larry Flanagan Rates are based on the LIBOR (London interbank offered rate) plus an interest rate spread. The interest rate spread is determined based on the maximum Pledged Asset Line amount.

    It is definitely more risky since it is dependent upon the market.

    My thought to hedge bets would be to secure a line that would be closer to 66% on the value of my portfolio, just to protect against a pullback.

    @Malcolm Douglas

    And I thought of that as well... My couple reasons for not liquidating are:

    1) My non real estate assets have had great success over the last several years (as I'm sure many people have had in the bull market)

    2) I like the diversification of investments

    3) I feel as though by taking out a line of credit against my investments I am basically using "free" money. If (and praying they do) my investments continue to grow, I can make money in the market as well as using the banks money to make money in real estate. I have been able to completely finance my last three deals through other loans and lines and am really enjoying the "infinite" cash-on-cash returns.

    Now, I do understand that a SBLOC is considerably more volatile than other avenues, so am not dead-set on it. I appreciate hearing your opinions to make sure whatever decision I make is not made through emotion.

    1Reply
  • Tom S.
    Real Estate Investor · Burlington, VT · Member since 2010 · 2k+ posts · 1k+ votes
    9y

    @Kyle Collette    Yes, stock market has been good and you could have a substantial tax bill if liquidating.  So definitely agree with your reasons for not liquidating.

    Good luck!

    - Tom

    0Reply
  • Malcolm Douglas
    Investor · Chicago, IL · Member since 2016 · 39 posts · 33 votes
    9y

    Tax hit is a good reason and should be definitely be a large factor as well.

    For me it's a risk preference thing. If I believe I can refi investment out immediately, creating infinite returns however you make down payment, I would rather use cash than add leverage on something that can be as volatile as stock. One day this bull market will need to correct and stocks can lose value fairly quickly. However, 66% LTV does give you cushion. Each person's risk appetite is different and I completely understand your points. I just suggest you make sure you understand the costs/risks when planning out.

    0Reply
  • Kyle Collette
    OP
    Investor · Columbus, OH · Member since 2016 · 112 posts · 79 votes
    9y

    @Tom S.  very true! 

    @Malcolm Douglas - I completely understand where you are coming from. My strategy is similar, I would just be using a line of credit for (depending on purchase price) either the down payment, or for the entire purchase and then use delayed financing to immediately refinance and pay back the line of credit - either way having 100% financing (if calling the line of credit "financed" or "leveraged"). My savings/checking accounts don't have nearly the same size funds available that a 100-150K line of credit would provide me, so just looking for more access to capital. Definitely not for everyone and has the potential to be more risky for sure; I just feel that if I am smart with my investments and maintain good lending relationships for refinancing back out, I have more purchasing power for the potential for "cash" purchases and quick closings in the eyes of sellers, as well as mitigating much of the risk involved by paying as much of the  line back as quickly as possible and using the cash flow to continue paying it down.

     Funny that I just asked this question.. going back through old podcasts and midway through #55 and Jimmy Moncrief is speaking about cross-collateralization and pledged asset lines.

    @Joshua D. and @Brandon Turner - looks like you guys know all the right people to answer my questions! Ha

    Thanks for all the insight and feedback, guys.

    2Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    clients of mine that do this borrow at 1 over libor  VERY Low  and they loan up to 50% of the current value of your securities so it would take a pretty big downward movement to create a loss..

    pretty solid I think and a great way to do BRRR .. HELOC's as you may or may not know are more risky.. they can be frozen and called at ANYTIME.

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    1Reply
  • Jason Hirko
    Lender · San Antonio, TX · Member since 2016 · 1k+ posts · 1k+ votes
    9y

    @Kyle Collette This is exactly what I use for my investing as do several of my partners. We pay anywhere from 125 - 150 bps above LIBOR and have lines of ranging from 50-65% of portfolio value. It is an excellent strategy especially when the market is gaining like right now. If my portfolio makes 8%, which should be easy in this economy, and my rate is (right now) 2.6% I get the delta of 5.4% on my stocks and the ability to buy what I want the same as cash. Add to that I don't have to liquidate and pay any capital gains, it makes it a pretty great investment financing strategy. 

    1Reply
  • Kyle Collette
    OP
    Investor · Columbus, OH · Member since 2016 · 112 posts · 79 votes
    9y

    @Jay Hinrichs

    Interesting - I actually did not know that about HELOC's; good to know.

    Thanks for the info on SBLOC's. The 50% seems like it would insulate you from the risk of a potential market pull-back. 

    Don't know if you would know or not, but do SBLOC's (or pledged asset lines, etc) need to be from the same financial institution where you do your investing?

    0Reply
  • Kyle Collette
    OP
    Investor · Columbus, OH · Member since 2016 · 112 posts · 79 votes
    9y

    @Jason Hirko

    That is a great return and use of assets!

    May I ask through what company you have your line of credit?

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    Kyle most folks don't know that about HELOC"s but read your documents its in there in the fine print I can gurantee it.

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    1Reply
  • Malcolm Douglas
    Investor · Chicago, IL · Member since 2016 · 39 posts · 33 votes
    9y

    @Jay Hinrichs - That is good to know.  What reasons would cause a lender to freeze/call?

    @Kyle Collette - Thanks for this post.  I've given this strategy more thought and consider it a new tool added to the financing tool box.

    0Reply
  • Jason Hirko
    Lender · San Antonio, TX · Member since 2016 · 1k+ posts · 1k+ votes
    9y

    @Kyle Collette U.S. Trust in Portland, OR

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @Malcolm Douglas HELOC's are generally second position notes.. and have high LTV's so they are at risk more than a first.

    banks want the ability to freeze them in a down turn or if your financial position changes so you don't evergreen it and then walk away.. bank has to foreclose on a Heloc and they lose ALL their money.. they are highly risky.. but that's what banks do right.. ... they never learn..

    there are companies that are paid to analyze banks loan portfolios..

    the loans are run through the computer they can spit out how many will default .. what part of the country is at risk and what profession the borrower is in that could cause an up set as well.

    this happened in mass during the GFC.. not saying it will happen today.. but its in your loan documents.

    I bailed out many many flippers .. who were half way through projects counting on being able to access their heloc to finish like they always did.. only to have a love letter form their bank that their heloc was frozen.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @Malcolm Douglas  like right now I bet you could not pull any money on a heloc in Houston  :( and or shortly will not be able to.

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    0Reply
  • Malcolm Douglas
    Investor · Chicago, IL · Member since 2016 · 39 posts · 33 votes
    9y

    @Jay Hinrichs valid point re Houston. Please tell me there is no way they could call a HELOC after a natural disaster like this? I would think insurance is the safeguard here.

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @Malcolm Douglas  they may not call it but they can certainly freeze it if they deem there collateral damaged and not of the same value when they made the laon.

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    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @Malcolm Douglas  the tough part is when they freeze these the letter is usually 4 weeks after the fact and you don't realize it until when you go to get the money its not there or you write a check on it and its returned.

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    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @Malcolm Douglas also think about it from the lenders position.. they give a 100% LTV heloc ( common) no flood insurance ... borrower evergreens it... IE pulls all the money then just walks away.. bank is screwed they just lost that money plain and simple.

    Podcast Guest on Show #222
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    0Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    9y

    A wealth manager I play softball with told me about some of his clients that do this and lend to RE investors. They're called Pooled Asset Accounts and these are high networth guys and only lend $400k - $2M each time.

    They pay like 2.6% interest on their margin money and lend out at 7-9% (+ an equity piece usually).  Great spread for them, but I found their velocity too high/horizons too short for an old B&H like me.  They wanted a 6-12 month turn.  

    One specifically likes raw land at busy street corners that he buys, then promotes to banks, Walgreens, restaurant franchises, etc.  Not my sandbox at all, but interesting.

    I proposed a multifamily buy with a 12 month refi out +$60K bonus + interest on $400k but they just yawned.

    Wealth management firms may be a potential private money source for investors that play with large flips or other fast turns. 

    0Reply
  • Malcolm Douglas
    Investor · Chicago, IL · Member since 2016 · 39 posts · 33 votes
    9y

    @Jay Hinrichs  Makes sense.  Probably all the more reason not to over leverage and have a good relationship with a lender.  Even if they can't prevent a freeze they can likely give a heads up which would save plenty of headache and time.

    0Reply
  • Michael McKay
    Rental Property Investor · Jacksonville, FL · Member since 2016 · 155 posts · 68 votes
    9y

    I recently did this with my brokerage account at Morgan Stanley for a house that I rehabbed and rented out. I'm 2 months away from passing the seasoning requirement for a cash-out refi, where I will pay off the line of credit. MS allows me to borrow up to half the value of my portfolio. It's very easy to do and was great when doing a rehab, as I would only borrow the money as I needed it (paying contractors, materials, etc.).

    The downside, as some people have mentioned, is that if the value of your portfolio drops there can be a margin call. This could force you to pay the difference or sell your stock. To avoid this, I've left a sizeable cushion in case the market fluctuates.

    I wouldn't use this as long term financing, but I like the strategy for buying in "cash" and the refinancing quickly.

    0Reply
  • Mark B.
    Colonia, NJ · Member since 2016 · 22 posts · 29 votes
    9y

    @Michael McKay Very cool, I'm curious to hear more about this. I actually posted about this the other day and didn't get much of a response. Figured it was more of a niche method than most of the usual ones. But I'm in a similar spot to you that I have a Morgan Stanley 401K/IRA account with significant investment in it and I was hoping to leverage that to use for BRRRR purposes some time in the near future. Though someone when I posted said that unlike a HELOC or HML you would not be able to write off the interest paid on the loan since the collateral guaranteeing the loan is not a physical property. I haven't checked with my CPA to confirm or deny but I've seen some conjecture on that point but more than likely it seems like it's true and that would be one detriment to using this method versus the others. Would love to hear your perspective of how you set it up, how long it took, the logic behind what percentage of your holdings they'll offer you as a line, etc. 50% was lower than I'd read about, it seemed more in line with 60-75% depending on the types of holdings I believe. Let me know how the process has gone so far for you and if there are any snags to look out for. Totally agree on giving yourself significant pad to prevent the loan getting called should a significant drop happen. Any notes or perspective would be much appreciative. Thanks!

    2Reply
  • Michael McKay
    Rental Property Investor · Jacksonville, FL · Member since 2016 · 155 posts · 68 votes
    9y

    @Mark B. I'm not sure about writing off the interest, but I only plan to use this for 6 months until I refinance, so I'm not too concerned. I've been planning to speak to my accountant about this. 

    The rate is based on LIBOR and has been around 5.2%, which is pretty good for money that I can access with no notice. Setup was very easy and took about a week. I'm not sure why it's 50%, but that was the number I was given. Mine is against stock and not my retirement accounts.

    It's been pretty smooth sailing so far (fingers crossed), but the main issue I could see is if for some reason there was an issue refinancing.

    Happy to chat further if you want to send me a PM.

    0Reply
  • Ed S.
    Investor · Oskaloosa, IA · Member since 2014 · 126 posts · 65 votes
    9y
    The 50% value is a securities Regulation. But you borrow 100% (or more) of your house value --- go figure. This is a perfect example of Gov't mesh/mash --- LOL.
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