Using Stock Broker Margin to Buy Real Estate

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ether
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Using Stock Broker Margin to Buy Real Estate

Post by ether » Fri Sep 14, 2018 5:16 pm

I'm looking to buy a home that I will stay in for 7 years. I have a 200k stock portfolio and the home costs 100k. To reduce on mortgage fees and interest, I've found that Interactive Brokers will give me a variable loan of 100k @ 3.2%
https://www.interactivebrokers.com/en/index.php?f=1595


Seems like it's cheaper than an ARM loan which is ~4.2% and gives me the flexibility of any cash buyer in the real estate market.

And to manage the risk of margin call I can buy super OTM puts to limit by downside. Providing me with a ARM loan for 100bps less than market

jacob
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Re: Using Stock Broker Margin to Buy Real Estate

Post by jacob » Fri Sep 14, 2018 5:49 pm

Ehh, those OTM puts aren't free, so it's less than 1% less than market.

In particular, as a retailer, your margin coverage has to be at least 50% ... so if you take out a 100k margin on your 200k and spend that cash on a house (leaving you with 100k of your stocks + 100k you bought on margin), you could risk getting maintenance calls immediately, so your puts need to be close ATM so they appreciate enough(*). Or you need more cash from elsewhere to defend it which kinda defies the point.

(*) OTM, your deltas are going to be very low, so you'd need a lot of them to get the -1 exposure to make yourself delta neutral (necessary when you're one adverse move away from a phone call).

ether
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Re: Using Stock Broker Margin to Buy Real Estate

Post by ether » Fri Sep 14, 2018 6:15 pm

jacob wrote:
Fri Sep 14, 2018 5:49 pm
In particular, as a retailer, your margin coverage has to be at least 50% ... so if you take out a 100k margin on your 200k and spend that cash on a house
It's IB so the maintenance margin is 25%
https://www.interactivebrokers.com/en/i ... 808010801

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Re: Using Stock Broker Margin to Buy Real Estate

Post by jacob » Sat Sep 15, 2018 6:47 am

Ah no, your margin to open is 25% but your margin (by reg T) to cover is 50% which is enforced at the end of the trading day.

For example, you deposit $10000 on margin. If you open a position of $30,000, you have to put down 0.25*30k=$7500. You can open another position for $2500 (the money you have left)/0.25 = $10,000. However, to cover at the end of day, they'll want 50% to cover. Since you hold $40,000 in stock, you need 40000*0.5=20000 deposited to keep it overnight. So since you already wired in 10k in cash, you need to wire in another 10k lest they sell enough of your stock to get coverage up to 50%.

If you're daytrading and closing out your position (or at least bring it down under $20k) at the EOD, the 25% applies.

Basically IB lets you play at the 25% level both to open and to maintain. Usually the maintenance margin is a little lower to account for fluctuations (so you don't get called out immediately, e.g. 25% and 20%. I suppose IB is being nice/tough about it ... but they legally have to cover their/your ass overnight at the 50% level. I don't know if there's any way to get around this as a retail investor. Companies generally have much lower margins. If you trade futures, they're lower still (under 5%, some as low as 1%) intraday but still go higher overnight.

chicago81
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Re: Using Stock Broker Margin to Buy Real Estate

Post by chicago81 » Sun Sep 16, 2018 9:50 am

You can get more leverage at IB if you have portfolio margin instead of RegT margining.

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Re: Using Stock Broker Margin to Buy Real Estate

Post by jacob » Sun Sep 16, 2018 9:57 am

Hmm... apparently "portfolio margin" (once approved) is a way to get around reg T at the retail level. You can disregard what I said in my previous post then.

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Re: Using Stock Broker Margin to Buy Real Estate

Post by Seppia » Sun Sep 16, 2018 12:22 pm

How fast could you repay the loan?
Because I'm not sure I would take a longer term loan at variable interest rates in today's world.
If you can pay it fast, it seems like a lot of work for little money. Let's say 7 years?
Assuming your OTM options cost you 0,3% (I'm pulling this number out of my a$$ as I have zero idea how much they cost, but I assume they aren't free), a very rough and not precise calculation of the savings would be

0.7% (real spread of interest rates)*100000$*7/2 =$2450

Over 7 years that's not a ton of money in the purchase of a house.

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