Personal Finance

Using stock market investments to finance real estate

  • Last Updated:
  • May 11th, 2019 7:13 pm
[OP]
Deal Addict
Sep 19, 2009
2065 posts
862 upvotes
Toronto

Using stock market investments to finance real estate

I am looking to buy a property using funds from my stock market investments. I could finance it in multiple ways and it seems hard to make a decision. As much as possible, I would like to keep most of the stock market investments.

I have a quite large income but no conventional employment income. Almost all my income comes from investments (dividends and capital gains, some unrealized) and probably half in registered accounts, mostly unrealized.

Here are some options:

  1. No initial mortgage, sell securities and pay for the property. After closing, take a mortgage or LOC to invest.
  2. Take a 70% - 80% LTV mortgage, sell some securities and pay for down payment or take a margin loan from my broker.
  3. Pay for the property with a margin loan from my broker.

The margin loan rate posted today is 2.717% which I believe is better than any mortgage rate available in Canada.

I would like to optimize the process, hoping for the best outcome. The intent would be to keep the loan at the highest LTV rate for as long as possible by reusing the new equity in the property as early as possible. Minimizing the amount of taxes would also be a very important criteria.

I am just brainstorming this for know and I am certain I can get great ideas here on RFD. I have not contacted any mortgage lender yet but I know there are brokers here on RFD and I would be very interested to hear their opinion.

TIA.
9 replies
Deal Addict
Oct 6, 2015
2463 posts
1367 upvotes
Capital gains on the positions in the stock brokerage account will be an issue you need to consider very carefully.

Also, you haven't stated whether this will be a property that you intend to rent out, for which the interest on the financing is deductible regardless. Or if it will be a personal use property, in which case, you would want to structure the transaction such that the borrowing against the property was used to (re)-purchase securities for which you could deduct the financing expense.
[OP]
Deal Addict
Sep 19, 2009
2065 posts
862 upvotes
Toronto
burnt69 wrote: Also, you haven't stated whether this will be a property that you intend to rent out, for which the interest on the financing is deductible regardless. Or if it will be a personal use property, in which case, you would want to structure the transaction such that the borrowing against the property was used to (re)-purchase securities for which you could deduct the financing expense.
Great point about deducting the interest, thank you. My accountant actually believes that interest paid to a stock broker is deductible anyway.
Deal Addict
Oct 6, 2015
2463 posts
1367 upvotes
andrew4321 wrote: Great point about deducting the interest, thank you. My accountant actually believes that interest paid to a stock broker is deductible anyway.
That may or may not be the case. I've read opinions that go either way, so I wouldn't automatically call your accountant wrong. But the safest way to proceed is to establish a clear trail from your borrowing to your investing.
Deal Addict
Dec 28, 2007
1018 posts
546 upvotes
Careful with the margin loans, as you could have a margin call if there is a big stock market crash. It would really suck if your brokerage liquidated your portfolio at the worst possible time. If you're going to go that route, at least have a HELOC for backup.

You would need to do the calculations to figure out how much you could sell without creating a lot of capital gains. Also depends if you have any losses to carry forward. You can also tap your TFSA and RSP (if you qualify for the HBP) for tax-free downpayment money, replenishing those accounts in future years.

If you end up selling securities with the intention of rebuying them with borrowed money, watch out for superficial losses.
Newbie
Apr 26, 2019
79 posts
110 upvotes
All good points. I'd like to know how you are getting margin interest of 2.717%? I've never seen it that low but that may just be my case not sure. Also....by 'investing in realestate what are trying to accomlish? Other that potential capital gains which may be getting to be long in the tooth at this point what is the allure of realestate. High housing costs make being a landlord no longer profitable in the best situation (rents paid will no longer even cover a low downpayment mortgage).....and with tenants 'knowing their rights' to the point of using those rights to screw over even good landlords at every turn I'm not sure its the best investment these days. Could turn out better than the stock market though so who knows.
Deal Fanatic
User avatar
Sep 23, 2009
5030 posts
2193 upvotes
BobW95191 wrote: All good points. I'd like to know how you are getting margin interest of 2.717%? I've never seen it that low but that may just be my case not sure.
Interactive Brokers is low:

https://www.interactivebrokers.com/en/index.php?f=1595

Margin loans are backed by securities though, you can't withdraw the money to invest in real estate.

As a quick example, you have $10,000 cash to invest. Your broker let's you buy $40,000 of securities and you pay interest on the $30,000 borrowed ($40,000 - $10,000). The $30,000 would be charged the margin interest rate.

Or am I wrong and your broker will let you withdraw the $30K for whatever? That doesn't make sense to me as they have no clear idea about the risk of the assets you are buying. Whereas they may limit your borrowing of stock based on the risk.
Deal Fanatic
Jul 30, 2003
5760 posts
540 upvotes
Toronto
JUnit wrote: Careful with the margin loans, as you could have a margin call if there is a big stock market crash. It would really suck if your brokerage liquidated your portfolio at the worst possible time. If you're going to go that route, at least have a HELOC for backup.

You would need to do the calculations to figure out how much you could sell without creating a lot of capital gains. Also depends if you have any losses to carry forward. You can also tap your TFSA and RSP (if you qualify for the HBP) for tax-free downpayment money, replenishing those accounts in future years.

If you end up selling securities with the intention of rebuying them with borrowed money, watch out for superficial losses.
If there is a housing crash - can't the banks call in high level of HELOC as well?
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Deal Addict
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Feb 1, 2012
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Thunder Bay, ON
renoldman wrote: Margin loans are backed by securities though, you can't withdraw the money to invest in real estate.

As a quick example, you have $10,000 cash to invest. Your broker let's you buy $40,000 of securities and you pay interest on the $30,000 borrowed ($40,000 - $10,000). The $30,000 would be charged the margin interest rate.

Or am I wrong and your broker will let you withdraw the $30K for whatever? That doesn't make sense to me as they have no clear idea about the risk of the assets you are buying. Whereas they may limit your borrowing of stock based on the risk.
Watch the movie Margin Call before doing this.

I borrowed from my margin account at TDDI for bridge financing on a real estate transaction. It was only for a couple of months. In their President's Account, for debit balances $100k+ the rate is currently 4.25% (prime + 0.3%). It's as simple as transferring money from the margin account to my chequing account. Their per-transaction limit on web transactions is $50k; had to call in for higher amounts. TDDI did not care if I deposited $10k then bought $40k of stocks, or if I bought $40k in stocks with cash, then withdrew $30k to convert the holdings to margin. There is no minimum repayment as their would be on a LoC.

My margin account states total margin available for the account, plus margin available for each security. TD has increased the margin requirement (i.e. lowered the amount you can borrow) on many securities over the past couple of years. Your broker should have documentation on margin requirements for various classes of investments, At TDDI, blue chip Canadian stocks you can borrow 70%, limits are lower on lower quality stocks and foreign stocks.

Without other funds readily available in case of a margin call, I would not borrow more than 40% of my limit, to cover the possibility of a major stock crash of about 50%, plus a lowering of the margin availability by 10%. Just my own guideline, but how much do you want to risk a margin call and having to sell stocks after a crash?

It is my understanding that the interest in such a scenario is not deductible as an investment loan. Interest is only deductible when used for the purpose of earning investment income. There must be a direct link between the funds borrowed and the purchase of the investment. In this case there is not, since the investment was purchased before the loan, and the loan was used to purchase a non-investment property. I did some research at the time to support that conclusion, but can't be bothered to look for again.

Above is my understanding and experience with TDDI. YMMV.
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Jr. Member
Aug 27, 2018
172 posts
163 upvotes
Deepwater wrote: Watch the movie Margin Call before doing this.

I borrowed from my margin account at TDDI for bridge financing on a real estate transaction. It was only for a couple of months. In their President's Account, for debit balances $100k+ the rate is currently 4.25% (prime + 0.3%). It's as simple as transferring money from the margin account to my chequing account. Their per-transaction limit on web transactions is $50k; had to call in for higher amounts. TDDI did not care if I deposited $10k then bought $40k of stocks, or if I bought $40k in stocks with cash, then withdrew $30k to convert the holdings to margin. There is no minimum repayment as their would be on a LoC.

My margin account states total margin available for the account, plus margin available for each security. TD has increased the margin requirement (i.e. lowered the amount you can borrow) on many securities over the past couple of years. Your broker should have documentation on margin requirements for various classes of investments, At TDDI, blue chip Canadian stocks you can borrow 70%, limits are lower on lower quality stocks and foreign stocks.

Without other funds readily available in case of a margin call, I would not borrow more than 40% of my limit, to cover the possibility of a major stock crash of about 50%, plus a lowering of the margin availability by 10%. Just my own guideline, but how much do you want to risk a margin call and having to sell stocks after a crash?

It is my understanding that the interest in such a scenario is not deductible as an investment loan. Interest is only deductible when used for the purpose of earning investment income. There must be a direct link between the funds borrowed and the purchase of the investment. In this case there is not, since the investment was purchased before the loan, and the loan was used to purchase a non-investment property. I did some research at the time to support that conclusion, but can't be bothered to look for again.

Above is my understanding and experience with TDDI. YMMV.
It's a very good movie, my favourite from the crash, although I've yet to watch "The Big Short" (will soon).

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