Alternative Financing – Securities Based Lending
Alternative Financing - Securities Based LendingLately I have had questions regarding alternative financing from clients who are building real estate portfolios but have met their four or ten loan limit. Security based private lending offers a way to potentially consolidate existing loans or use securities to finance additional properties.
As an example, let’s say I own $1M in Pepsi stocks. These cannot be retirement funds, but must be liquid assets (stocks, bonds, futures. etc.). With a securities based loan, an investor could procure 60-90% of the value of that stock (or $600K to $900K) on an express credit line.
So what are the benefits of this type of financing?
Simplified Lending Process
- The approval process takes only 5-7 days.
- There are no points, no costs, and no underwriting fees or costs to set up a credit line.
- There are no fees, aside from interest, to draw down on the credit line.
- The credit line can be used for any purpose, aside from purchasing additional securities.
- Since this isn’t a mortgage, in the traditional sense, a property purchase would be structured like a cash transaction, void of any lender costs.
Low Interest Rates
The interest rate for security based lending is based on a one month Libor plus 3.75%-4.25% depending on amount borrowed.
This ends up providing a rate of between 4-4.5% which is better than anything the banks are providing now.
This is a variable rate. Which can be problematic, should rates increase over time. That said, the rate is based off the Libor index, which typically is a slow moving index. Better yet if investors have interest rate increase concerns, they can fix the rate at any time for up to a five year term. With the fixed five year term, a one year Libor is used. I calculated that today, and it came out to about 5%. Planned properly, you could enjoy the benefits of today’s low variable rates, and 3-4 years down the road, if rates begin to rise, lock in a 5 year fixed rate, providing many years of favorable interest rates (a long enough hold for most investors).
The low rates, combined with no loan fees can make for some incredible returns on purchases in today’s market.
Compare a traditional loan of 5.25% w/$4000 of closing costs
Securities based loan of 4.5% w/$1400 in closing costs
After 7 years, the securities based loan saves a total of $8500 ($5,100 in interest payments, $2400 out of pocket down payment expenses, and $1000 equity pay down).
The flexibility allowed for an investor with this type of financing may be the most attractive benefit.
- This type of loan can be used for many purposes, bridge loans, real estate, etc.
- Investors can pay back as fast or slow as they choose. Investors pick their own payment terms, interest only or capitalize interest payments as part of outstanding balance if there is borrowing capacity available.
- It can be used over and over again. The asset is not pledged as collateral, so it does not show up as another loan on your credit report (i.e. it looks like a cash transaction).
In essence you are borrowing on margin. The big fear would be that is that if your Pepsi stock drops from $1M to $500K, you will only be able to borrow 60-90% of what your stock is worth, by dealing with a broker, your stocks are evaluated based on their risk and a maximum loan amount is tabulated that should minimize this risk.
*(As a disclaimer, I am not an expert in this area, so your lender would have to answer specific questions.)