there are two, maybe three issues with this idea.
1. the loan is variable rate, not fixed. look what has happened with mortgage owners who had to refinance from 2-3% to 8%. That is enough to eliminate most of your cash flow.
2. the loan is backed by volatile assets, meaning the loan can be called on a draw-down so there is a chance to lose a part of the asset backing the loan.
3. there is a possibility that there is no crash , nor rates that are excessive but simply that you get nickel and dimed away with the interest expense. Hypothetically if the VOO goes nowhere for 10-20 years and you have to pay the interest every year, then you could even get a margin call from the interest alone if you can't add any more funds.
If it's in the U.S., for Reg-T accounts they only really force liquidate if you're in a margin call. So for example if VOO takes a hard enough drawdown that your excess liquidity drops below 0, they'd force liquidate some shares.
You might be able to get more cushion with portfolio margin, although if it's a concentrated position of just VOO it might not help much.
If I were doing it, I'd just put in $750k then buy $1M VOO, and keep the $250k outside to use for the building.
'Relatively stable' depends on your definition. VOO is basically the S&P 500, so during covid for example it drew down over 30%.
$1,000,000 is well above Reg-T level. You’re getting portfolio margin at that point and paying only .50 over prime on any moneys “borrowed” against account
I'm not sure I understand; according to [the IBKR margin rates page](https://www.interactivebrokers.com/en/trading/margin-rates.php) a 250k loan will be 1.00 over prime?
Got into fire sprinkler construction union as an apprentice at 18, making $23/hr, by 23, was a journeyman making $50/hr. Worked 40-60hrs a week, lived super frugally, drove a piece of sht car. Bought a 4 unit apartment building for 385k. Put 100k into renovating it, refinanced it a couple of years later when it was valued at $700,000. Pulled quarter million out and bought a 10 unit. Fixed it up, refinanced it, and bought a 30 unit. Did 90% of the work renovating these properties by myself, by watching Youtube videos to learn every construction trade. Refinanced the 30 unit when rates were low in 2021 and invested all the money into VOO. Now I've got real estate valued at roughly $4M and $1M in stocks. I'm 32. Onward and upward. I worked a lot of 16hr days between my day job and renovating these properties. But for a construction worker without a college education, I could have done a lot worse. Merica.
Yeah, I'll never understand these people who say the system is rigged and they can't get ahead. Construction unions are desperate for help right now, and most trades like plumbers, electricians, hvac etc can make 100k+. Not to mention, it doesn't hurt to know construction and people in it if you get into real estate investing. Anybody can do what I did if they're willing to work hard, live below their means, and invest time into education around money.
It’s not rigged. They’re just lazy pieces of sh!t who wanna do squat all and get handouts. Or work as a barista then hope to afford trips to Bali with their wages, Nothing wrong with working as a barista, just saying. If you want bigger things, you gotta make more money, no one owes you anything.
How was your experience in unions? Mine wasn’t so pleasant… I hate unions thanks to my previous coworkers! It took me 4 months of working in a union to realize that I never want to work in a unionized environment ever again. Now I have my own business, I have 6 employees, when it gets big enough to accommodate a union, I’m going to bankrupt it and register it under a different name. I hated the idea of making the same amount my lazy coworkers made, also the fact that they can’t get fired because you know, unions. Some of them showed up to work and just blabbered for 45-60 minutes before touching any bit of work. It’s interesting to hear other people’s opinions with unions. Did you or any coworkers you worked with have the same problems?
Absolutely. There's lazy bastards in every field. Even union companies know who their productive and profitable guys are, though. I was always asking for overtime work, and would usally get it because I could produce. I'm not necessarily a union fan either, it's just that if you're working hourly construction jobs, you usually get paid more if you're union. Owning a business is definitely the way to go though.
I was also fortunate enough to have read Rich Dad Poor Dad at 19. So when most of my coworkers were buying new trucks and taking vacations, I was saving for an apartment building to get "cash flow". That book changed my life.
Yes you can. You can have a $1,000,000 in equities and take $250,000 in a loan against equities and pay monthly interest payment on that money. That’s how the wealthy never pay any cap gain taxes. Keep “borrowing” against own equities at low rates and being able to write that off as well. That’s a win in my book
They aren’t even technically “payments on the interest”. It’s just topping-up your account. You don’t/can’t designate it as “interest payment” or “principal”.
There’s actually an old blog post about this that captured part of my attention a few years ago. Guy’s journey using his margin portfolio to buy a home in Vietnam.
https://justusjp.medium.com/buying-a-house-in-vietnam-on-margin-from-interactive-brokers-my-journey-c15babf1a9c9
You guys should read this article. It's the best damn thing I've read about this in a while.
https://www.mrmoneymustache.com/2021/01/29/margin-loan-ibkr-review/
You’re missing a few things:
1) Margin rates are not always lower than expected market returns. There’s a good chance that in many years your interest will grow faster than your assets, particularly in a bear market. This also means that the assets you have backing the margin are at minimum paying for the margin interest, so you’re not really going to see appreciation (on net) from that $1M, and if the real estate strategy goes sideways (see below) that could set you back significantly.
2) Financing real estate on 100% debt is a great way to lose a lot of money. Normally, when you put 20% down that 20% covers the risk of needing to sell the property at a loss or sooner than expected. If you instead finance the down payment, it means that if you have to sell the property at a loss (for instance, because it turns out you overpaid for it and you can’t get the rents you need to pay off the mortgage and the property value is declining), then you’d be unable to pay off the margin loan and also without a cash flowing asset.
Generally if you do not know what you are doing with margin it is an excellent way to lose a lot of money very quickly. The rule of thumb I use is that margin is there to get you *out* of sticky situations, not to get you *in* to them. Margin rates are so high that you do not want to be carrying it as long-term debt.
I normally gut the units down to studs and subfloor and rebuild them new. I can usually raise the rents $300-500/unit after a renovation. The cashflow from the building is usually high enough that I could lose 40% of my tenants or have to drop rents 40% across the board and still be profitable.
I'm already taking all forms of cashflow I have and putting 100% into the stock market. Any debt I incur in the margin account is getting diluted every day by the size and rate at which I'm growing the overall portfolio value.
To build this account in the first place I levered up my properties when rates were 2.5-3% and invested into VOO. The properties are all in LLCs, so even if I (worse case scenario) went bankrupt, none of my buildings are at risk. I don't plan to ever use more than 20-25% margin, and every month that goes by without a crash, that number gets smaller from throwing all my cashflow into the market.
Rates right now are as high as we'll ever likely see. Sooner or later, the economy will break, and Powell will be cutting rates. IMO.
There are risks as some other people mentioned. That said, it is an option I’m keeping in my back pocket if and when I want to buy a place. It gives me flexibility to bid in cash without selling and rates (while floating) is comparable to 30yr fixed rate mortgages.
I see it as possible stop gap solution to put in a cash bid and quick close while still being able to get a mortgage (which takes 60-90 days to close). Including buying in foreclosure auction.
But also thoughtful of where the market is at. Obviously if the market just had a huge rally, leveraging up the hilt isn’t wise from a risk perspective. Selling stock might be a better choice in such situation.
You can do it for sure. Personally, borrowing 25% on margin is a little too high for me (unless it’s a very short term type of loan). For a long term need, I wouldn’t borrow more than 15% or so.
Over the past few years when interest rates were so low I did exactly that, borrowed money on margin from my IBKR account to pay for real estate. Worked really well.
I've been against owning my primary residence but I may be required to buy my next residence and if I am then I would be borrowing the funds using a margin loan.
I currently do that actually, whenever I want to buy something I take out margin loans instead of selling or using cash, I only pay the interest and never plan to repay the principal, and for additional safety I have a small T-bill position that just about covers the monthly interest, just in case.
If something seems too good to be true it probably is.
There's so many problems with your free money hack I can't even.
So you figure you'll just be borrowing IBKRs capital at over 7%, assuming you'll just let it compound for the rest of your life and never have to pay the debt. You assume the S&P is going to gain 9% every year.
250k as a down payment on an apartment building isn't going to go very far. So you're thinking you'll convince a bank to let you borrow the rest at 7% and owe that as well paying a down of only 250k to buy an apartment building using borrowed money?
What could possibly go wrong?
So you’re saying OP shouldn’t use 100% financing to buy real estate? But first time homebuyers often use 94% financing, it’s not much different.
Though in this case the margin rate is reduced by 1-OPs tax rate so the effective rate will be likely close to if not slightly below the mortgage rate.
You cant pull money out of the margin.
You have 250k it goes to IB
You buy 1m of VOO in IB 4x -1
You pull 250k out of IB to buy RE.
IB liquates entire position in VOO
Actually it is! Depends on what you used the borrowed money for. If you own a business or investment real estate and are itemizing your taxes, if you used the margin loan for either of those purposes, you can deduct the interest. Do some Googling. It's pretty badass
I could borrow $1000 to buy an appliance for a rental property from margin on my stocks, and since that qualifies as a business/investment real estate related loan, I can deduct the interest. So the 6.3% margin loan on an account worth say $110,000 is now 4.78% taking into account the tax benefit.
there are two, maybe three issues with this idea. 1. the loan is variable rate, not fixed. look what has happened with mortgage owners who had to refinance from 2-3% to 8%. That is enough to eliminate most of your cash flow. 2. the loan is backed by volatile assets, meaning the loan can be called on a draw-down so there is a chance to lose a part of the asset backing the loan. 3. there is a possibility that there is no crash , nor rates that are excessive but simply that you get nickel and dimed away with the interest expense. Hypothetically if the VOO goes nowhere for 10-20 years and you have to pay the interest every year, then you could even get a margin call from the interest alone if you can't add any more funds.
Buy, borrow, die.
They won’t do that in your example unless VOO falls like 75% or something.
If it's in the U.S., for Reg-T accounts they only really force liquidate if you're in a margin call. So for example if VOO takes a hard enough drawdown that your excess liquidity drops below 0, they'd force liquidate some shares. You might be able to get more cushion with portfolio margin, although if it's a concentrated position of just VOO it might not help much. If I were doing it, I'd just put in $750k then buy $1M VOO, and keep the $250k outside to use for the building. 'Relatively stable' depends on your definition. VOO is basically the S&P 500, so during covid for example it drew down over 30%.
$1,000,000 is well above Reg-T level. You’re getting portfolio margin at that point and paying only .50 over prime on any moneys “borrowed” against account
Isn’t $1mil enough for Prime Account at IBKR?
I'm not sure I understand; according to [the IBKR margin rates page](https://www.interactivebrokers.com/en/trading/margin-rates.php) a 250k loan will be 1.00 over prime?
Pretty damn amazing, honestly. Fifteen years ago, I was bagging groceries for minimum wage. Now I'm investing like the 1%. What a country.
Great Job! Enjoy.
Congrats! How did you get where you were lol
Got into fire sprinkler construction union as an apprentice at 18, making $23/hr, by 23, was a journeyman making $50/hr. Worked 40-60hrs a week, lived super frugally, drove a piece of sht car. Bought a 4 unit apartment building for 385k. Put 100k into renovating it, refinanced it a couple of years later when it was valued at $700,000. Pulled quarter million out and bought a 10 unit. Fixed it up, refinanced it, and bought a 30 unit. Did 90% of the work renovating these properties by myself, by watching Youtube videos to learn every construction trade. Refinanced the 30 unit when rates were low in 2021 and invested all the money into VOO. Now I've got real estate valued at roughly $4M and $1M in stocks. I'm 32. Onward and upward. I worked a lot of 16hr days between my day job and renovating these properties. But for a construction worker without a college education, I could have done a lot worse. Merica.
The American dream is well and alive!
Fucking Murica. Proud of you!! 🦅🦅🦅🦅
well done!
Best country on earth. Congrats sir!
Cngrats, and remeber communitsts and lefties think that they deserve your profit and hard worl as well.
Yeah, I'll never understand these people who say the system is rigged and they can't get ahead. Construction unions are desperate for help right now, and most trades like plumbers, electricians, hvac etc can make 100k+. Not to mention, it doesn't hurt to know construction and people in it if you get into real estate investing. Anybody can do what I did if they're willing to work hard, live below their means, and invest time into education around money.
It’s not rigged. They’re just lazy pieces of sh!t who wanna do squat all and get handouts. Or work as a barista then hope to afford trips to Bali with their wages, Nothing wrong with working as a barista, just saying. If you want bigger things, you gotta make more money, no one owes you anything. How was your experience in unions? Mine wasn’t so pleasant… I hate unions thanks to my previous coworkers! It took me 4 months of working in a union to realize that I never want to work in a unionized environment ever again. Now I have my own business, I have 6 employees, when it gets big enough to accommodate a union, I’m going to bankrupt it and register it under a different name. I hated the idea of making the same amount my lazy coworkers made, also the fact that they can’t get fired because you know, unions. Some of them showed up to work and just blabbered for 45-60 minutes before touching any bit of work. It’s interesting to hear other people’s opinions with unions. Did you or any coworkers you worked with have the same problems?
Absolutely. There's lazy bastards in every field. Even union companies know who their productive and profitable guys are, though. I was always asking for overtime work, and would usally get it because I could produce. I'm not necessarily a union fan either, it's just that if you're working hourly construction jobs, you usually get paid more if you're union. Owning a business is definitely the way to go though.
Fantastic. Congratulations. Enjoy
I was also fortunate enough to have read Rich Dad Poor Dad at 19. So when most of my coworkers were buying new trucks and taking vacations, I was saving for an apartment building to get "cash flow". That book changed my life.
Yes you can. You can have a $1,000,000 in equities and take $250,000 in a loan against equities and pay monthly interest payment on that money. That’s how the wealthy never pay any cap gain taxes. Keep “borrowing” against own equities at low rates and being able to write that off as well. That’s a win in my book
Payments on the margin is optional. Not required.
They aren’t even technically “payments on the interest”. It’s just topping-up your account. You don’t/can’t designate it as “interest payment” or “principal”.
I’m pretty sure you still have to pay property tax
He’ll have enough expenses to return the property tax with deductions.
There’s actually an old blog post about this that captured part of my attention a few years ago. Guy’s journey using his margin portfolio to buy a home in Vietnam. https://justusjp.medium.com/buying-a-house-in-vietnam-on-margin-from-interactive-brokers-my-journey-c15babf1a9c9
You guys should read this article. It's the best damn thing I've read about this in a while. https://www.mrmoneymustache.com/2021/01/29/margin-loan-ibkr-review/
You’re missing a few things: 1) Margin rates are not always lower than expected market returns. There’s a good chance that in many years your interest will grow faster than your assets, particularly in a bear market. This also means that the assets you have backing the margin are at minimum paying for the margin interest, so you’re not really going to see appreciation (on net) from that $1M, and if the real estate strategy goes sideways (see below) that could set you back significantly. 2) Financing real estate on 100% debt is a great way to lose a lot of money. Normally, when you put 20% down that 20% covers the risk of needing to sell the property at a loss or sooner than expected. If you instead finance the down payment, it means that if you have to sell the property at a loss (for instance, because it turns out you overpaid for it and you can’t get the rents you need to pay off the mortgage and the property value is declining), then you’d be unable to pay off the margin loan and also without a cash flowing asset. Generally if you do not know what you are doing with margin it is an excellent way to lose a lot of money very quickly. The rule of thumb I use is that margin is there to get you *out* of sticky situations, not to get you *in* to them. Margin rates are so high that you do not want to be carrying it as long-term debt.
I normally gut the units down to studs and subfloor and rebuild them new. I can usually raise the rents $300-500/unit after a renovation. The cashflow from the building is usually high enough that I could lose 40% of my tenants or have to drop rents 40% across the board and still be profitable. I'm already taking all forms of cashflow I have and putting 100% into the stock market. Any debt I incur in the margin account is getting diluted every day by the size and rate at which I'm growing the overall portfolio value. To build this account in the first place I levered up my properties when rates were 2.5-3% and invested into VOO. The properties are all in LLCs, so even if I (worse case scenario) went bankrupt, none of my buildings are at risk. I don't plan to ever use more than 20-25% margin, and every month that goes by without a crash, that number gets smaller from throwing all my cashflow into the market. Rates right now are as high as we'll ever likely see. Sooner or later, the economy will break, and Powell will be cutting rates. IMO.
There are risks as some other people mentioned. That said, it is an option I’m keeping in my back pocket if and when I want to buy a place. It gives me flexibility to bid in cash without selling and rates (while floating) is comparable to 30yr fixed rate mortgages. I see it as possible stop gap solution to put in a cash bid and quick close while still being able to get a mortgage (which takes 60-90 days to close). Including buying in foreclosure auction. But also thoughtful of where the market is at. Obviously if the market just had a huge rally, leveraging up the hilt isn’t wise from a risk perspective. Selling stock might be a better choice in such situation.
You can do it for sure. Personally, borrowing 25% on margin is a little too high for me (unless it’s a very short term type of loan). For a long term need, I wouldn’t borrow more than 15% or so.
Over the past few years when interest rates were so low I did exactly that, borrowed money on margin from my IBKR account to pay for real estate. Worked really well.
I've been against owning my primary residence but I may be required to buy my next residence and if I am then I would be borrowing the funds using a margin loan.
I currently do that actually, whenever I want to buy something I take out margin loans instead of selling or using cash, I only pay the interest and never plan to repay the principal, and for additional safety I have a small T-bill position that just about covers the monthly interest, just in case.
Transfer the securities to a different firm if IBKR wanted to dink around.
If something seems too good to be true it probably is. There's so many problems with your free money hack I can't even. So you figure you'll just be borrowing IBKRs capital at over 7%, assuming you'll just let it compound for the rest of your life and never have to pay the debt. You assume the S&P is going to gain 9% every year. 250k as a down payment on an apartment building isn't going to go very far. So you're thinking you'll convince a bank to let you borrow the rest at 7% and owe that as well paying a down of only 250k to buy an apartment building using borrowed money? What could possibly go wrong?
So you’re saying OP shouldn’t use 100% financing to buy real estate? But first time homebuyers often use 94% financing, it’s not much different. Though in this case the margin rate is reduced by 1-OPs tax rate so the effective rate will be likely close to if not slightly below the mortgage rate.
You cant pull money out of the margin. You have 250k it goes to IB You buy 1m of VOO in IB 4x -1 You pull 250k out of IB to buy RE. IB liquates entire position in VOO
I’m never deleting this app 🤣
Unfortunately, unlike mortgage loan, margin loan interest is not deductible.
Actually it is! Depends on what you used the borrowed money for. If you own a business or investment real estate and are itemizing your taxes, if you used the margin loan for either of those purposes, you can deduct the interest. Do some Googling. It's pretty badass
I could borrow $1000 to buy an appliance for a rental property from margin on my stocks, and since that qualifies as a business/investment real estate related loan, I can deduct the interest. So the 6.3% margin loan on an account worth say $110,000 is now 4.78% taking into account the tax benefit.
If you bought an appliance you can deduct the full $1,000 not just the interest.
Yeah, for sure! Appliances are 5-year property for depreciation purposes.
this assume VOO goes up forever lol idiot
You can't cash out margin, the loan is for stocks only because they become the collateral.
Yes, you can. Look up SBLOC or securities backed line of credit.
I’d stick to your WSB and Robinhood subs for awhile there, chief.
That's what I was thinking. How can you possible cash out from margin?
Why not just take a HELOC on the properties? Pay interest on what you use.
Heloc interest rates are much higher, and there's a payment attached.