We have the ability to get up to ~$100k at 3.25% simple interest through a margin loan with our brokerage account. I know these kind of loans are often used only for short term cash needs since rates are usually higher and there is the theoretical risk of a margin call, and of course the rates are always variable with LIBOR.
I have several conservative real estate investment opportunities (~5 year hold) that I am very confident would generate at least 7-8% annualized cash on cash returns (probably more like 10-12%) and 16% IRR over the hold period, so I’m trying to understand why taking out a 3.25% margin loan and investing the money to get more than double the return wouldn’t be a no-brainer. Assuming of course that there is low risk of a margin call as we’d only borrow against a small (<20%) portion of our investment account.
What are the flaws/risks with this approach to utilize leverage?
Submitted January 31, 2018 at 01:37PM by hbone7