Single-family homes and condos in and around Newport, Rhode Island are selling quickly these days. Low interest rates and an exodus from big cities have created high demand for homes in this area. The only trouble is: not enough houses are for sale. In today’s intense real estate market, a common question I get from homebuyers is how they can make their offers more competitive. One strategy I have found success with is called buying on margin.
What it Means to Buy on Margin
Using a margin loan to buy a home allows investors to borrow money against stock portfolios via a low-interest loan. The cash generated from the margin loan can be used to present a much stronger offer when time is of the essence and competition is steep. After purchasing the home, the buyer can get a mortgage and repay the loan, making it a short-term tool to amp up a bid on a home.
An Example of Buying on Margin
Margin loans generally allow a person to borrow about 60% of the value of the stock portfolio depending upon the makeup of the assets. For example, if a portfolio is worth $100,000, you may be able to take out $60,000 to put toward a more stand-out offer. Keep in mind that the actual amount will largely depend on the diversification of your portfolio and professional advice from your financial advisor.
Tax Benefits of Margin Loans
It’s understandable to have hesitations about tapping into stock portfolios. Many people purchase stocks with long-term strategies in mind. They use this investing approach to build wealth for a more secure future, often retirement. Another reason some may hesitate to sell their portfolio of stocks is for tax reasons. Investors may be hoping to avoid paying capital gains taxes which are applied to the profits earned on the sale of stocks. The good news is that using a margin loan to buy a home allows homebuyers to borrow money against stock shares without selling any of them.
While buying on margin can be a smart strategy for certain buyers, it’s not without some risk. Just as a market crash is a risk with every stock portfolio, it’s also a consideration when using a margin loan to buy a house. There is no pre-payment required and no penalty for closing the account, but if the stock market crashes and you’re borrowing on margin, you may have to pay a margin call in order to ensure the loan stays at the approved loan to value ratio. It’s important to work with a professional and ensure you fully comprehend the risks.
Make Your Home Offer Stand Out
In today’s highly competitive housing market, it’s key to present offers that are eye-catching and enticing enough to stand out among the others. There are several helpful ways to set your offer apart, and buying on margin so that you are able to present a cash offer is one of them. If you’re interested in learning more about margin loans or wondering if it’s a smart move for your particular situation, reach out to your financial and tax advisor for more information. Looking for other tools to prepare to make a quick offer? We can help.