Securities-Based Lending
Monday, July 7th, 2014
By: Steve Goldman, CCIM
A fast and low-hassle alternative to conventional bank real estate financing | Image courtesy of www.madisongroupfunding.com
By Paige Christenberry
Private Wealth Advisor, Senior Vice President
Regions Private Wealth Management
A Securities-Based Line of Credit (SBL) can be used for a variety of needs including bridge loans, business expansion, debt/loan consolidation, or even personal expenses and luxury purchases such as yachts or private jets. For real estate investors, the SBL has become an extremely useful tool to have available. With real estate underwriting by most lenders becoming increasingly cumbersome, the SBL can be a fast, easy and less costly solution to financing an acquisition of investment real estate. The loan proceeds can be used as your 20% equity or as additional equity needed when a first mortgage must be assumed.
With an SBL, you use the borrowing power of your eligible securities account to access the liquidity you need to act on important opportunities while still keeping your long-term investment goals on track. This is a great alternative to using cash to purchase real estate as well. By having a Securities-Based Line of Credit in place, there won’t be a need to sell assets (which may have tax implications) or secure a last-minute loan, so you’ll be able to move faster when you are offered a great deal. There are typically no fees, charges or closing costs associated with an SBL and interest payments will not begin until you draw from the line. The SBL is typically priced against the 30 day LIBOR index plus a margin, which is very competitive.
How does a Securities-Based Line of Credit work? In most cases, the lender will require that your investable assets/securities account be held with their institution. Most financial institutions have capable Portfolio Managers that will work with your investment goals and objectives to structure a portfolio of equities and fixed income instruments to suit your risk tolerance and long term needs. If you currently have a portfolio with another firm, those assets can be transferred over to the lending institution “in-kind” without creating any tax consequences or disruption of the current holdings. Once the assets are held with the lending institution, you will pledge the account as collateral for the line of credit. Every lender is unique, but most do not require any financial or income verification for these types of lines. The hassle factor is greatly reduced as there is no need to assemble tax returns, personal financial statements, rent rolls or leases. The line will be set with a maximum limit, for example, 60% of the value of the account. There will be margin call implications if the account has large market fluctuations, so be mindful, that you may need to reduce the outstanding balance on the line or add eligible securities to the account if the line of credit exceeds approximately 65% of the asset balance in the case of this example. Once these lines are in place, they typically stay in place with no defined maturity date unless you decide to liquidate or transfer your assets from the institution. The monthly repayment structure for an SBL is typically an interest-only payment on the amount drawn on the line each month based upon a variable rate of interest.
If you are interested in this concept, but prefer a fixed rate, fixed term note, rather than a variable rate line of credit, ask your lender about those options as well. Most financial institutions are more than willing to accommodate this type of request, but may require some limited financial and income verification or documentation in these circumstances. Regardless of the structure, you could obtain financing for your project with no lender closing costs or fees, which will increase the bottom line for the return on your investment. One final point to know is that these accounts cannot be collateralized with a “qualified” account such as an IRA or 401k. Annuities, hedge funds and restricted stock are also ineligible for collateral on this type of loan.
In summary, if you are looking for an easy approval with quick turnaround and a low cost solution to allow you greater borrowing flexibility and better ability to manage your cash flow, you may want to consider a Securities-Based Line of Credit or other Securities Backed Loan Options. You can have access to money in days rather than weeks or even months and keep your cash working for you in the market.
For more information, you may contact Paige Christenberry, Regions Private Wealth Management at (865) 521-5104 or [email protected].
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