When it comes to investing, some people prefer stocks.  Other prefer bonds.  And of course, there are those that prefer real estate.  One common point I hear from stock traders is the fact that they would LOVE to buy real estate right now but they don’t want to sell their stocks.  Maybe they have Apple and Google stocks?  Maybe their stocks are paying good dividends.  Whatever the reason is, they just don’t want to let it go, which is more than understandable! I wouldn’t want to either!  But what if there was a way that you could still keep the appreciation from the stock, AND the dividend, but BORROW against it to fund the purchase of a property?  I’m going to give you the basic overview of how this can be done with a securities based loan.

Usually, there are many questions that come along with this discussion and I’ll go over most of the questions that I get.  First and foremost, what can you borrow against?  You can basically borrow against any publically traded stock, exchange traded funds, and most medium term notes and treasury bills.  There are a few financial tools that you *CAN NOT* borrow against.  That includes retirement accounts — such as your 401k —  CD’s, annuities and some money market accounts.

Now that we know what we can borrow against, what’s the limit??  So long as you meet the minimum $100k, there is MAXIMUM of 80% of value.  That means if you have $1M in stocks, you can borrow up to $800k.  If you have $100m, you can borrow up to $80m. There is NO dollar amount maximum so long as you stay under that 80% range.  And unlike commercial loans, there are usually no closing costs. Not only are the loans not recorded, the loans are NON-recourse, meaning that if you default on the loan it will NOT ruin your credit and the lender will not peruse further action. These loans are also fixed for 3 to 10 years, can be funded within about 2 weeks, and the interest rates vary from 2.5% f to 5% fixed or interest only.

I bet at this point you’re probably thinking, “This sounds too good to be true. What’s the catch??”  Well there is no catch.  It’s a straightforward transfer.  You transfer your interest in a stock to a lender, BUT you get to keep ALL the appreciation AND dividends once throughout the entire 3-10 year time period,…and you get full rights to your stocks once the loan is paid in full.  Throughout this time however, you can’t sell your stocks.  Because this isn’t a constructive sale, it won’t trigger a taxable event according to the IRS Code section 1058.  What this basically means is that you don’t technically own your stocks during the loan’s time period, but you still get all the appreciation and dividends.  Once your loan is paid back the stocks are then retransferred to your name and you can do with them as you wish just like before.

Now that we’ve gone over some of the basics, let’s get into other questions.  First, what can you use this money for? You can use the proceeds for virtually anything.  You can buy a car or buy a property.  This is a great way to avoid having to pay high fees and a high interest rate as I discuss in my “Hard Money Loans” video.  Secondly, this loan you receive is based on the value of your stocks. What if your $1m in stocks drop in value??  What the lender does is keep a running value of your assets.  If the value drops by a certain percentage, you’ll be faced with two choices.  You can either pay back the loan, or you can pay back a portion to fulfill the ratio requirement that’s been set.  These ratios aren’t going to be affected by small dips in the stock market.  If you borrowed $800k on a $1m value, the stocks would have to drop by almost 30% to 40% before any action must be taken — but of course each lender is going to have their own specific numbers.

And remember, if for some reason your stock plummets and you have more cash in your hand than you have value of your stock, you could simply walk away with the funds and not repay the loan. It doesn’t go on your credit and its non-recourse.  They only get to keep your stocks.  Again, this is just one more tool that you as a buyer can utilize to expand your investment portfolio…now that’s good to know. 🙂

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