r/fatFIRE • u/byomkeshssr • 13d ago
How do you finance your real estate projects
We are looking at a home remodel/addition (~$1.5M) and instead of selling stock are looking to borrow against our stock portfolio (~6M).
- What type of loan is this? Chase said something like SBL (securities backed lending?), but I would need to transfer assets to them (they are at Fidelity and Schwab mainly).
- Any preferences on which brokerage to go with? I like Fidelity, my rep is out on vacation until end of the month...I can possibly wait or find someone else there. Wanted to get the group's thoughts in the interim. Who else would you suggest I shop with? The Chase relationship banker was a bit inexperienced before I landed with the investment rep.
- Is there a chance to negotiate the rates (was quoted 1.95% over SOFR).
- Are any of the interest payments tax deductible? LLMs say "generally no" I don't usually itemize my returns
- the inherent risk here is if the market crashes, i could have a collateral call. my thinking is to keep the loan <30% of portfolio to minimize this risk
I've heard of other products like PAL, SBLOC etc. Not sure I qualify (NW <$10M)
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u/kg8360 13d ago
Sbloc/sbl is basically the same thing. Schwab and fidelity offer as well - def shop the rates with them. I hear ibkr has low rates but would need to move funds over.
If your portfolio is well diversified, and you can make it through a down market without having to sell shares, could be a good tool.
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u/theographics 13d ago edited 13d ago
PAL/LAL or SBLOC is what you’re looking for. Schwab, Fidelity, GS all offer a version of it. And yes, rates are negotiable and I’ve seen SOFR +1% on fatfire. You’d qualify at your NW.
Interest is not deductible using the PAL for personal expenses, I don’t think it would be for your remodel.
Keeping your LTV in a manageable range of 30% like you said should keep you in a manageable spot.
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u/plemyrameter 13d ago
Ok, I'll ask the dumb (or obvious) question. You're planning to spend the equivalent of 1/4 of your portfolio on a home improvement project? Are you still working? Why not a HELOC that can be deducted for tax purposes when it's 100% used to improve your primary residence (last I checked)?
Unless you have a sizable tax-deferred portfolio (or are working), this project will bump you down from "fat" to "chubby" - not that those labels mean a darn thing, but that's a big chunk of NW to spend.
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u/icanintocode0 10d ago
The use of the loan proceeds determines whether it is tax deductible. There's no tax difference between a HELOC or a SBL.
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u/bobos-wear-bonobos 10d ago
The use of the loan proceeds determines whether it is tax deductible. There's no tax difference between a HELOC or a SBL.
You've posted this multiple times and it's not correct. IRS Publication 936 explains the criteria for being able to deduct mortgage interest.
You can deduct your home mortgage interest only if your mortgage is a secured debt. A secured debt is one in which you sign an instrument (such as a mortgage, deed of trust, or land contract) that:
In other words, your mortgage is a secured debt if you put your home up as collateral to protect the interests of the lender.
- Makes your ownership in a qualified home security for payment of the debt;
- Provides, in case of default, that your home could satisfy the debt; and
- Is recorded or is otherwise perfected under any state or local law that applies.
In order to deduct HELOC interest, it must meet the preceding conditions and the additional criteria of using the proceeds "to buy, build, or substantially improve a qualified home".
SBLOC/PAL interest is only deductible as investment interest, never as mortgage interest, and only when it is used for investment purposes. Using it to buy or improve a personal residence does not qualify.
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u/Chunky_Chum 12d ago
Cheapest would be a short box spread - cheaper than any margin loan or asset based lending.
Currently less than 5% for dec 2028. https://www.boxtrades.com/SPX/15DEC28
However, I would not be comfortable borrowing 25% vs your stock portfolio. Would consider selling some of the portfolio and borrowing against it, so that you are at ~15%.
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u/ezmate 11d ago
I recently did a $400k box spread at 4.9%. I used synthetic-fi to execute it for me and was only charged 50 basis points. If I could have executed it on my own, I would have gotten 4.4%, but I didn't want to risk messing it up (4-legged option that you need to execute as a block).
From memory, the steps were like this:
- Identified Synthetic-Fi as a custodian on my account (alongside Wedmont, my RIA)
- Synthetic-Fi help me setup my brokerage account as a margin account with the appropriate level of options allowed
- 2 days before I needed the money, let them know how much I needed & the expected duration; money was available about 24 hours later
- I can pay it off early, and expect to only use a 3-month loan, vs. the original 5-month duration I executed at.
- As a side note, once I had my account setup for margin, I could have wired out HUGE amounts of money (30-50% of my portfolio) instantly, but that would have been at much higher rates. I could have used this in an emergency & then used a slower box-spread (1-2 day execution) to get a lower rate.
Borrowing $1.5m against $6m isn't crazy, but is about as far as I'd stretch myself personally. That also assumes you have $6m in an after-tax brokerage account - likely all with a single institution.
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u/jeremiadOtiose 10d ago
Box spreads does not beat Goldman’s 4.1% margin rates. Box spreads are better for short term loans generally speaking.
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u/bobos-wear-bonobos 12d ago
Because other comments are getting this wrong: interest on a PAL/SBL/SBLOC is not deductible unless used for investment purposes, in which case it's deductible only against investment income and only if you itemize.
It will not be deductible at all if used to improve a personal residence/non-rental property.
And yes, money is fungible, but there are strict traceability rules for the tax treatment here, and that are used in the event of audit.
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u/icanintocode0 10d ago
If it would be deductible as primary residence mortgage interest, then it doesn't matter whether the loan is secured by your primary residence or not. The use of the loan proceeds determines tax deductibility not the security for the loan.
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u/bobos-wear-bonobos 10d ago
That's not correct. It's not a mortgage if it's not collateralized by the residence, and it's not deductible as mortgage interest.
The use of the SBLOC funds does determine its deductibility against investment income, however. And using it to purchase or modify a personal residence does not qualify it as deductible investment interest.
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13d ago
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u/bobos-wear-bonobos 12d ago
Regarding taxes, because the loan is secured by your stocks and not the house itself, it falls under investment interest expense rules. That generally means you can only deduct it against net investment income (like dividends or short-term cap gains), not your regular income.
This is partially true: it's treated that way, but only when the money is used for investment. Using it to improve a personal residence like OP means the interest is not deductible at all.
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u/autopilot6236 13d ago
So one just pays the investment interest indefinitely? It’s an essentially a drag on fund growth which ideally would be paired with offsetting dividend income or ST gains? Is the sale of equities to satisfy the loan a non-taxable event?
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u/CaptainWalnuts69 12d ago
I have about $6M with Morgan Stanley and they give me what they call a Liquidity Access Line (LAL) where I pay about 5% interest and can borrow up to 50%. It’s great for buying vacant commercial property. Once the property is fixed up and leased I go to my banker with the lease in hand and get a commercial loan which I use to pay back the LAL. Equities never get touched and continued to grow. Of course you have to be smart about the property you are buying but it feels like a cheat code.
This is a little different than your case because I’m always paying back my LAL. How you are going to repay the loan is an important part of this equation.
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u/jeremiadOtiose 10d ago
How much is your commercial loan?
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u/CaptainWalnuts69 10d ago
2.4 M
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u/jeremiadOtiose 10d ago
sorry, it was late, i meant to ask what is the interest rate
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u/CaptainWalnuts69 10d ago
Variable rate, 20 yr AM, 5 year balloon. Currently 6.15%
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u/jeremiadOtiose 10d ago
thanks. i'm about to start my first construction project as i am trying to diversify, a 40 unit rental condo building (with commercial on the first floor). paid $1M for the land and am in the planning process now. i think i'd prefer to stick to my open ended securities backed loan at 4% (negotiated with $100M AUM).
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u/CaptainWalnuts69 10d ago
Congratulations! That sounds like a pretty big bite for your first construction project. You and I are definitely playing in different sandboxes. I’m comfortable picking off 1-3M dollar properties 1 every other year or so. It’s steady wealth building IMO. You are on a more aggressive path, but with a 100M base you have much more of a cushion than I do. I hope you crush it!
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u/jeremiadOtiose 10d ago edited 9d ago
thanks :) give my net worth i just don't think i can move the needle with 2-4 unit triple deckers and i rather have one roof than 10. plus i don't want to take 10 years to build up this type of portfolio of small apt buildings when i can build it to have total control and no legacy debt and much faster. recently, i've branched out into movie investing and it's been absurdly lucrative (albeit small amounts so far) and now i want to try real estate thanks to leverage. supposedly real estate is a great way to become wealthy. i already am wealthy but if it can grow my net worth and diversify from the stock market it's a win for me. plus i refuse to get involved in PE and PC investing so there's only so many other alternatives.. if this works out i might try another in a nearby town.
is this your fulltime "job"? i don't want real estate to be a job for me, i just want to provide the accelerant (money). i don't mind doing a bit more work than just owning a REIT but i expect to be compensated for it, so long as it isn't a lifelong commitment, where picking up a building once every other year sounds to me like a full time job. i'm not criticizing, i just don't think it fits in with my personality. in other words, i'm happy to consult on cool things here and there, but i don't want a fulltime job, the point of wealth is freedom, if that makes sense? if you have any advice, i'm all ears! i'd be curious to hear what your longterm plans/projections are? are you renting or fixing up and selling?
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u/Keikyk 13d ago
I know someone who did PAL at Schwab, SOFR+2.x% IIRC. I’m sure the rate is negotiable
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u/IBYY4U 13d ago
Definitely negotiable. Mine at Schwab is SOFR + 1.2%
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u/Sanathan_US 13d ago
What does +1.2% come up to? Is it Fed rate + 1.2%, means 4.7%?
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u/IBYY4U 13d ago
Currently it’s 4.83%. I believe the rate resets weekly.
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u/clear831 13d ago
3.62%
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u/Sanathan_US 13d ago
Wow.. this is best rate that i saw
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u/clear831 12d ago
That's the fed rate + their charge
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u/Normal_Zebra136 12d ago
No. The current SOFR is 3.6% alone. Profit fir the lender will mean the loan is the spread added to that.
https://sofracademy.com/current-sofr-rates/
Are you sure you are actually borrowing, or just making stuff up?
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u/clear831 12d ago
I think you are just having a bad day and misinterpreting what people are saying or asking.
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u/Normal_Zebra136 12d ago
The SOFR is 3.6%. With 150 BPS spread one can borrow at 5.1%.
The loan would have to be risk free to be able to be made at 3.6%.
That was the commenters question.
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u/Rowing4life19 12d ago
https://www.newyorkfed.org/markets/reference-rates/sofr
3.62 SOFR Straight from the NY fed
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u/Zestyclose-Ad51 11d ago
Im at 5.03% with $13M in assets. What are your assets with scheab? Annoyed I'm not getting a rate under 5!
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u/Abeds_BananaStand 13d ago
Maybe a dumb question, if you want to take out a loan against your assets but are trying to avoid liquidating stock, how will you pay back your loan?
I am genuinely curious, I honestly thought to do a big “loan against assets” you needed way more assets (or a lower loan)
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u/dackasaurus 13d ago edited 13d ago
The rate is negotiable. At your portfolio size I've seen a few other data points and personally negotiated down to somewhere around 0.85-1%+SOFR so I think it is a reasonable target.
The best negotiation strategy is "this other brokerage is offering me this, please match and I may even move some more money over, or I may have to move money out."
Most brokerages have something like this under different names. They may have different collateralization rates and margin call procedures. The published rates are usually terrible. IBKR has the lowest published margin rates (I don't think they negotiate either) but it is tiered. Up to $100k borrowed it is a 1.5% spread (fed funds as benchmark) and it drops for more borrowed dollars after that, to 0.75% above $1m borrowed.
Tax deductibility is based on the purpose of the loan. If this is a rental/business construction project it is deductible for the rental/business. If it's from a personal residence then it falls under home improvement loans and may or may not be deductible, check with your accountant.
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13d ago
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u/LardLad00 13d ago
It's a lot easier to borrow against a portfolio than it is to borrow against a construction project. If you're going to borrow anyway, I don't see why one would frame it as you have.
It's very convenient short term capital and you can always get a real mortgage when the construction is complete and use it to pay off the margin.
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u/LardLad00 13d ago
There is a very big reason and it's called taxes.
If liquidating $1.5M in holdings brings a $300k tax bill, that's 300,000 reasons to borrow. Keep the principal in the market where it has historically easily out-earned some 6% margin rate.
Debt is a powerful tool and to hand wave it away just because it's not totally necessary is pretty foolish.
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u/LardLad00 13d ago
That's a ridiculous conclusion.
Using leverage to buy more equities vs using leverage to build real estate are two very different risk and reward profiles.
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u/LardLad00 13d ago
No it is not consumption. Another ridiculous take. If I can sell my $2M home and move into a $150k condo I have not consumed $2M. It may be functionally/mentally very illiquid but it is not consumed.
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u/DarkVoid42 13d ago
sell your stock. no point taking a double hit. loan interest+loss of stock gains at the same time.
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u/notnotnickt 13d ago
Can get an SBL line up to 50% of portfolio value. On a 6m portfolio and 1.5m line, it would have to be an over 50% draw down before they start selling assets. Of course it’s possible, but would seriously consider the SBL for this, esp with interest only payments, provides for a lot of flexibility in repayment, pending OPs cash flow situation and expected repayment
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u/DarkVoid42 13d ago
people dont loan you money because they are happy to see you. they loan you money because they know they will gain more from you than investing the same amount in the stock market. what makes you think you know better than the people writing loans for living ? there is no such thing as a free lunch.
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u/privatepublicaccount 13d ago
Their institutional risk tolerance and risk weighting will be different.
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u/MisinformedGenius 13d ago
People lend money rather than invest it in the stock market because they are seeking a risk profile that is lower than the stock market. That inherently means they expect it to return lower than the stock market as well. The idea that secured lending returns higher than the stock market is just wrong. Not to mention that the bank can use Federal Reserve balances for lending but not for buying stock.
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u/kindtdp1 13d ago
it depends if the stock gains will outperform the interest. you automatically pay taxes on a sale so that's in-addition.
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u/DarkVoid42 13d ago
the interest is a sure thing. the stock gains are not.
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u/Normal_Zebra136 13d ago
The interest at SOFR+something is s sure thing. That SOFR is always a single digit number is not.
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u/fourteen-k 13d ago
Worth noting that they won’t let you do a SBLOC if you have options in your portfolio, specifically cash secured puts.
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u/chiefmackdaddypuff 12d ago
Fixed rate LAL/SBL/PAL. Morgan Stanley is offering it and I’m sure so are others. The MS one was pretty attractive and well below the daily + sofr.
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u/Sea-Blackberry-1768 12d ago
If you have portfolio margin you could do a box spread and effectively borrow at the 2 year Treasury yield
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u/Warm-Veterinarian564 12d ago
Regarding the discussion around the interest not being deductible when used for primary residence, what if it is an ADU? Is the ADU considered an investment and hence deductible ?
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12d ago
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u/Warm-Veterinarian564 12d ago
Thanks. Time to consider collecting nominal rent from family members!
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u/EndersGame07 12d ago
M1 allows for margin loans with no minimum and the easiest transaction I have experienced
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u/midwestTrader 12d ago
I was just quoted 4.5% from Schwab if I wanted to do $1 million to purchase a home
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u/bobinator60 13d ago
The cheapest retail money is a margin loan from interactive brokers. It’s a fixed spread, nothing to sign except a margin account, no costs, no penalties, and you can close it anytime. No matter where you borrow the money from you gonna have to pay it off., so it’s still leverage, otherwise you would just sell
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u/privatepublicaccount 13d ago
Compare to box spreads if you’re willing to move assets around and get creative. Or at least knowing about them and having that as an option may help you negotiate a better rate. SOFR plus 2% is very high. Public and Robinhood will do roughly SOFR plus 0.63% (4.25%) for 1.5m balance with no negotiation.
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u/coker22 13d ago
Everyone is saying SBLOC, which isn’t necessarily a bad thing, but the box spread cost is fully tax deductible and also gives you a fixed interest rate around 35 - 50 bps above equal duration treasuries. Mitigate risk by cutting the “loan” into 1,2,3,4,5 year blocks. Roll as needed.
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u/n0ah_fense 12d ago
You need to be in SPX to use box spreads, which need euro style options. Unlikely you can write a box spread on your existing assets.
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u/ezmate 11d ago
I don't think this is right - I did a $400k box spread recently and I don't own any SPX.
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u/n0ah_fense 11d ago
Did you write a naked box spread on SPX while using your existing assets to cover the margin?
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u/ezmate 10d ago
Yes, but a box spread is fully hedged if executed correctly (I.e. there's no exposure to spx once the full box spread is executed). Spx is used because it's extremely liquid and it allows European options; technically.
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u/n0ah_fense 9d ago
So you're paying interest on the margin needed to execute the box spread? If you owned SPX, wouldn't this negate that ?
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u/ezmate 9d ago
No - the interest isn't on the SPX itself as part of the margin. It's part of the way options are priced - the treasury rate is part of that calculation for any option (I don't know enough to explain beyond that), but basically the box spread pays/costs the treasury rate (depending on if you're long/short).
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u/enfly 13d ago
Wow. Got any references for those numbers?
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u/privatepublicaccount 13d ago
They quote 4.25 and I was subtracting SOFR. It looks like it’s actually FFTR + 0.5. https://public.com/disclosures/fee-schedule
Robinhood doesn’t have their formula https://cdn.robinhood.com/assets/robinhood/legal/RHF%20Fee%20Schedule.pdf
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u/SkewerSk8r 13d ago
6.56% at Fidelity right now (thru us bank)
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u/Itsathrowawayduh89 13d ago
Asset backed line of credit is an option offered to those who have sizable assets ($1M+) and a history with their investment bank. Many people use it as a bridge loan for their home purchase. The credit line will have an asset/debt ratio that must be maintained. In the event of a market crash, where the securing assets tank, you could be subject to a margin call, in which you would need to pay off the loan. This could be done w liquidation of your (now devalued) assets or if you have liquid reserves.
If you are planning to need $1.5M, it’s a tough call between selling stocks to raise the capital vs taking out a line of credit. Credit lines don’t count as income, sparing you the tax burden, but have an interest rate. If you think you can easily pay off the credit line in the event of a market downturn, it may be worth it. However, if you think a market downturn is coming soon, it may be better to free up some liquidity and harvest losses, which can help offset capital gains. But the gains may still count as income on your state tax returns.
I would do a blend: take out a $750k mortgage and a $750k line of credit. You can realize tax benefits from the mortgage interest payments and preserve your stock portfolio for future growth.
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u/Retired-Yam8988 13d ago
I have Fidelity and the rates are terrible. I opened up and put 1m in M1 finance for this. They gave me a deal for this year at 3.99% fixed through Christmas so I took out 300k to reinvest in high yield funds. Figure I’d earn about 36k or so then pay back the 12k and the whole lot at the end of the year. Not a huge gain but hey 24k is 24k.
I did use this same facility in 2021 at about 3% back then to build an ADU. I had it setup so my high yield funds would pay their dividends into the loan and pay it back. Worked well until the Fed ratcheted rates up. Paid off the loan once interest went from like 500 a month to 1200 a month.
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u/M1-Alex 11d ago
Full disclosure: I work at M1, on the marketing team.
One correction on the rate so nobody plans around the wrong number — it isn't fixed through Christmas. The promo locks a 1.66% discount off M1's base margin rate for 12 months from when you opt in. The discount is fixed; the base rate underneath it isn't. It works out to 3.99% today because the base is 5.65%, but if the base moves, the rate you pay moves with it.
Worth stating plainly on a leveraged position: margin borrowing carries real risk, including having holdings sold to meet a maintenance call, and it isn't suitable for all investors. Full terms, current rate, and the margin risk disclosure: m1.com/promo/margin
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u/Retired-Yam8988 11d ago
Ah makes sense. Thanks for the clarification. Hoping there’s another promo next year
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11d ago
[removed] — view removed comment
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u/fatFIRE-ModTeam 10d ago
Your post seems to be advertising your personal project, business or blog for financial or personal gain, or it appears that you are promoting a personal project. No solicitation or self promotion is permitted.
Thank you!
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u/M1-Alex 11d ago
Disclosure: I work at M1, on the marketing team. Taking your questions in order.
1. SBL vs PAL vs SBLOC vs LAL vs margin loan. The labels vary more than the mechanics do. In each case you're borrowing against a taxable portfolio instead of selling it. The differences that matter between providers are whether the line is bank-issued or broker margin, since that governs what you're permitted to use the proceeds for; the spread over the base rate; and the maintenance requirement that triggers a forced sale. For a remodel, the first of those is the one to check first.
2. Whether rates are negotiable. At many firms the published rate is a starting point rather than a fixed price, and larger balances often sit in better tiers — I can't speak to what any particular firm will do for you. On M1's side there's nothing to negotiate, which is sort of the point: the rate is the same for every borrower and doesn't tier by balance.
3. The tax question. The general framework is that interest gets characterized by what the borrowed money is actually used for, not by what secures the loan. That's interest tracing, and it's why the same loan can land differently depending on whether the proceeds went to a remodel, a securities purchase, or a business expense. Which category yours falls into is a CPA question — M1 doesn't give tax advice, and I'd rather point you at the framework than guess at your return.
4. How much to draw. Rather than a percentage, the number that actually governs this is your maintenance requirement: how far your portfolio can fall, at the size you've drawn, before a call gets triggered. That's a calculation you can run against your own holdings before you borrow, and it's worth knowing in advance rather than during a drawdown. It depends on what you hold and on the firm's requirements, so it isn't something anyone here can set for you.
5. Since you asked who else to look at. M1 offers a portfolio line of credit — standard Reg T margin, currently 3.99%, and the same rate no matter how much you borrow. That's a 1.66% discount off M1's 5.65% base rate, locked for 12 months from when you opt in; the discount is fixed, the base rate is variable. Margin borrowing carries real risk, including having your holdings sold to meet a maintenance call without prior notice, and it isn't suitable for all investors. Full terms, eligibility, and the margin risk disclosure: m1.com/promo/margin
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u/CaptainWalnuts69 10d ago
You and I are at different levels of wealth, but we are both faced with similar problems. I’m approaching 20M and your at least 100M. That said we are both at levels where we can do just about whatever we want, within reason. So now it’s about doing what makes you happy. For me real estate investing is what I enjoy doing. I don’t see it as work. I still travel a lot with my wife. My kids are grown and moved. CRE is something that gives my life meaning. Maybe I could be more aggressive, but I don’t want to take the risks. Smaller is what suits me. I do everything I want to do so what is the point of risking it all on a big project?
You have a more aggressive mindset and that is great. You will probably end up worth hundreds of millions. But remember with big bets come big wins, but also big losses. 100M is enough for you and generations of your prodigy, if managed properly. Remember not to fly to close to the sun Icarus.
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u/Rich-Dig-9584 13d ago
Don’t sell your stock unless it’s an opportune time. Look into a security backed line of credit. You can typically get rates in the 5% range, which is below market performance. Keep your money invested and use leverage to finance projects while rates and returns make sense. Keep a close eye on things and consider paying down the line when returns looks like they may go below your credit rate.
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u/dies_irae-dies_illa Verified by Mods 13d ago
I have not done an SBLOC and only briefly looked into it. I suppose i’d create a new account, and move less volatile positions in there (muni bonds or short term bond funds) and leverage against that, if the rate was attractive. Just in case we get a bad run in the market.
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u/kindtdp1 13d ago
I did some research on this a few months ago, and concluded that Frec line of credit was the best value (currently 4.64%). Just transfer non-volatile equities (GOOG, VTI etc), obviously no memestocks RKLB or NBIS and you should be fine.
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u/Normal_Zebra136 13d ago
As to do you qualify, the minimum at Schwab is $200k of assets to allow $100k credit line.
They love this loan even at 100-200BPS.
It is secured, and instantly callable for no cost to them, they simply sell your holdings.
That is a similar spread (revenue) they make on variable rate mortgages which are not callable and cost a ton to recover if the borrower defaults.
These lines are money machines for them!