Using margin loan for investment
Question: In relationship to my other recent note (thread titled “Investment mortgage advice needed, NJ”), I’m now looking at alternatives. One, in particular, is to take out a margin loan against my existing securities. I can currently withdraw about $150K, of which about $40K is cash the rest margin loan. I figure that if I put the full net income ($800/month after taxes) back into this at current margin rates (4.75%), then I’ll be paying down the margin loan at about 100-200/month. Once the lease on the property gets renewed (2006), I’ll be able to double those payments.
Does this seem like a reasonable alternative – keeping in mind that there’s the risk of the property going unrented (small, but possible), and obviously there’s the risk of a market crash causing a margin call (again, small but possible)
Answer: Much better alternative – you will find difficulty in obtaining conventional financing for only 2/3rds of a business/building.
If you were my client, that is what I would suggest you do. Don’t go to the full 50% on your margin, and that risk will be smaller. And, as you pay off some of the balance it will also go down. You may want to couple the portfolio with some covered calls, to generate some income in the portfolio to also drop the margin amount. Then, even if the market goes down you keep the income and should not hit the 70% level that will cause the margin call to kick into place.
Remember one other thing. The margin account is a variable. don’t assume it is 4.5% (By the way. I see most margin rates even for preferred customers at higher than that right now. Are you sur it is 4.5%? Just chekcing.) If rates go up (and they probably will from here, since we have probably hit bottom and will start rising whent he economy picks up) then the rate will go up too. SO, keep that in mid too as you do this deal.
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