Pay off investment property using margin loan??

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cautiousimprudence
Posts: 1
Joined: Sat Nov 27, 2021 11:56 pm

Pay off investment property using margin loan??

Post by cautiousimprudence »

Hello Bogleheads,

I am not sure I understand the full pros and cons of this decision so looking for your advice.

1. I have a rental property with a stable tenant. Current mortgage on it is $70,000 with an APR of 4.99. I pay about $855 per month that includes taxes and insurance held in escrow.

2. I have a brokerage account with Interactive and I can pay off the loan above using less than 15% of my portfolio. Current IBKR margin rates are 1.58%

Does it make sense to pay off the mortgage using margin loan from IB? Some of the Pros and Cons I could come up with.

Pros
1. Peace of mind from a paid off property
2. I do not have to make monthly payments any more. I can pay the same monthly amount to IB and pay down more of the principal due to difference in interest. I can also choose to skip it, and not even pay interest, as long as I can keep the margin at a lower risk level.
3. During the days the property is vacant between tenants, my cost of operations are pretty low.
4. I can increase my HELOC on this property to act as a backup for market downturns.
5. The current loaner collects the escrow in advance. I am sure they invest it somewhere to make money. I could do the same, say buy investments over the year and then pay again from margin, without having to sell securities.

Cons
1. IB Rate can go up
2. I don't have to worry about making real estate tax or insurance payments anymore. They take care of it. (though this is a minor one, I can do it always)
3. Locked in equity?
4. Market can crash putting pressure on margin.

Others??

I can pay the entire thing off in one year from savings if need be. I just chose to invest it instead. I also intend to keep the margin usage less than 20% to stave of market crash risk.

Many thanks in advance
bayareaeuropean
Posts: 6
Joined: Sat Jan 04, 2020 9:29 pm

Re: Pay off investment property using margin loan??

Post by bayareaeuropean »

Two things here:

1. Can you refinance to something like 7y APR, and what is the interest? If your current APR is based on fixed rate, you need to redo the calc and compare it with the variable rate mortgage. Especially since you said you have escrow, I rejected escrow in every one of my mortgages.

2. Would there be tax consequences? For example, mortgage interest on a rental property is tax deductible from rental income, while your IB margin loan interest is not going to be.

Your other property costs (insurance, property taxes) will of course remain the same, unless you plan to lower the insurance.
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