BiggerPockets Money Podcast - 376: Margin Loans: Low-Interest Lending or Risky Rates?

Episode Date: January 20, 2023

Margin loans could be the sneakiest way to snag a low-interest rate loan in today’s Fed-influenced environment. What most investors don’t know is that you can use your stock portfolio as collateral to get massively discounted lending, but it comes with considerable risk. Carl and Mindy Jensen used this type of lending to buy their most recent real estate purchase, a medium-term rental renovation project in the same neighborhood as their primary residence. At the time, Carl could get an interest rate so attractive that it was almost impossible to pass up. We’re talking about mortgage-sized loans with less than 2% interest! This seemed like a steal at the time, but as the market started to tank and big tech stocks like Tesla took a tumble, Carl and Mindy’s margin loan began getting hit. They faced a tough decision: either get liquidated and lose much of their stock portfolio or come up with the difference themselves. In this episode, you’ll hear exactly how Carl and Mindy grew their stock portfolio to multiple millions in worth, the mistakes they made along the way, why they took out a margin loan, and whether or not they’d do it again. If you’ve got a sizable stock portfolio but don’t know how to get funding for your real estate deal, stick around! Margin loans could be an option for you, but you’ll need to know how to work them first. In This Episode We Cover Margin loans explained and the risk that comes with a low-interest rate loan  Investing in tech stocks and whether or not they’re worth it now that stock valuations are down Index fund investing and why single stock-picking may be riskier than you think What getting a “margin call” means, and what to do when your stock values drop HELOCs (home equity lines of credit) and using them as a safety net for paying off debt Carl and Mindy’s new medium-term rental and whether the headache was worth the new house And So Much More! Links from the Show Find an Investor-Friendly Real Estate Agent BiggerPockets Money Facebook Group BiggerPockets Forums Finance Review Guest Onboarding Mindy's Twitter Mile High FI Podcast 1,500 Days to Freedom Carl's Email Listen to All Your Favorite BiggerPockets Podcasts in One Place Apply to Be a Guest on The Money Show Podcast Talent Search! Subscribe to The “On The Market” YouTube Channel Listen to The “On The Market” Podcast: Spotify, Apple Podcasts, BiggerPockets Check Out Mindy’s 2022 Live Spending Tracker and Budget Finance Friday: My Home Renovation Put Me in a HELOC Hole Click here to check the full show notes: https://www.biggerpockets.com/blog/money-376 Interested in learning more about today's sponsors or becoming a BiggerPockets partner yourself? Check out our sponsor page! Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to the Bigger Pockets Money podcast where Scott interviews Carl and me about our most recent real estate investment, purchased with creative financing in a changing real estate market within a rapidly rising interest rate environment. It'll be fun. Spoiler, it will not be fun. I think what I'm hearing you guys say is, look, we made a set of rationalized decisions that to us seemed very reasonable. and we borrowed against the cheapest source of capital, which was this one, one and a half quarter ridiculously low interest rate margin loan. And that that didn't work out in 2022. And, you know, when we talk about thinking in bets, this is a bad outcome, good decision. And this is something that you would do again. And that if you did it, if you do it over the course of 10 years, 9 out 10 years, this is probably going to work out as the cheapest source of capital to use to finance a rental property in your situation. And therefore, it makes a lot sense.

Hello, hello, hello. My name is Mindy Jensen. And with me, as always, is my steady hand co-host, Scott Trench. Thanks, Mindy today. We're shaking it up, as you said, and having a inviting Carl on the podcast. So thank you guys for coming on. Yes, Scott, it's good to see you again. It's been a long time. I understand your family size has increased by 50% since last time we talked. Congratulations on that. We jumping into the money nerd numbers already. By one human. We consider our cat part of the family, so it's probably just a third. But close on. What's that noise cats make when they're angry? That's pretty good. Scott and I are here to make financial independence less scary, less just for somebody else. To introduce you to every money story because we truly believe financial freedom is attainable for everyone, no matter when or where you're starting. That's right. Whether you want to retire early and travel the world, go on to make big time investments in assets like real estate, start your own business, or deal with the ramifications of good problems, like getting 100x returns on tech stocks and figuring out how to maximize that.

We'll help you reach your financial goals and get money out of the way so you can launch yourself towards those dreams. Scott, I like that foreshadowing. So I'm going to go with what my attorney makes me say the contents of this podcast are informational in nature and are not legal or tax advice. And neither Scott nor I nor Bigger Pockets is engaged in the provision of legal tax or any other advice. You should seek your own advice from professional advisors, including lawyers and accountants regarding the legal tax and financial implications of any financial decision you contemplate. And also, the stock picks that Carl and I made are not recommended. for you. If you make picks and they don't work out, don't come blame us. Before we start, let's take a quick break. Tax season is one of the only times all year when most people actually look

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subscription with the code pockets. What I personally like is that Monarch keeps you focused on achieving, not just tracking. You can see your budgets, debt payoff, savings goals, and net worth all in one place. So every decision actually moves the needle. Achieve your financial goals for good with Monarch, the all-in-one tool that makes money management simple. Use the code pockets at monarch.com for half off your first year. That's 50% off at monarch.com code pockets. I love that, said no one ever. Nobody starts a business thinking, you know what would make this more fun? Calculating quarterly estimated taxes. But somehow every small business owner ends up doing it. Your dreams of creating, selling, and growing get replaced by late nights chasing receipts,

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for me over over 10 years. Kickstart your well-being journey with your first audiobook free when you sign up for a free 30-day trial at audible.com slash BP money. Well, let's set this thing up and try to kind of frame the story we're about to tell here. I've already kind of alluded to it in the intro there, but you guys have picked technology stocks in the past and they've done very, very well and, you know, incredible returns. Thanks to, you know, perhaps really skillful investing, perhaps a bit of luck and, you know, a great bowl market here.

I would love to hear about that story, about how that came to pass, how you started investing in tech stocks and those returns. And I'd love to hear about how that led up to the events of 2022, which I think are really interesting and illuminating story for us. Okay, Carl, you want to talk about your massive luck. Scott said maybe a little bit of luck. I'm going to go with, it was a whole big bunch of luck. Yeah, I think it was pretty much luck. I feel like we needed a sound effect like the way back machine because, Scott, I'm going to take you back to way back to 2004. And before I tell you about these couple of stocks, I want to preface my story by saying,

I'm a big believer in index funds now. But I did not know what an index fund was until like 2013 and 2014. So back then I was a computer programmer and I was kind of obsessed with everything around that, the technology. And the first time I encountered Google, I could go full on nerd on you, but your audience doesn't want to hear that. I thought Google was incredible. So I'm like, I want to invest in this company.

and it wasn't quite public, but then I learned it would be public in August 2004. So we bought, I think it was probably about $5,000 worth of Google shares. And Google's done super good. It's done awesome. And I just continued to buy other tech companies. We bought Facebook and that IPO. And I think that was around 2012, although double-checked me on that. Another one I bought, I'm a nerd, and I thought Elon Musk was cool,

although that might have changed recently based on current events. But he was doing all those cool tech stuff. I'm like, that guy's pretty cool. And then I saw a Tesla on the road. And I'm a car guy too. And I thought, man, that's a pretty neat car. I'm just going to take like a couple thousand bucks and throw it into Tesla and see what happens. Just on a whim.

I didn't really expect that to amount to anything. But that was back in the end of 2012. And I think the split adjusted shares were like 66 cents right around there somewhere. And now they're still. despite the things that have happened recently with the stock decline. There's still over $100, so it's been a fantastic return. A couple others real quick. We have Amazon and Apple as well.

And my biggest strength is just being a stubborn ass, which usually doesn't serve you well in life, but when you hold stocks and they do well, not selling one, they have an incident or wrong things happen, bad things happen, bad temporary things happen. It works out well most of the time. So I think that Carl is glossing over the fact that he reads every bit of news about every one of these companies obsessively every single day. And it's kind of difficult to get the idea of the scope of his research into all of these companies just with a quick five-minute overview of his investments. But he subscribes to this newsletter and that newsletter, and he listens to every Tesla podcast and all the time. And I mean, I know listeners have heard me tied him jokingly. He talks about it all the time.

He's constantly doing research and reading articles and gathering knowledge. It isn't just, oh, I Googled something once, so I thought it was a cool company. So I threw some money at it. He did a lot of research into each one of these companies before actually throwing money in there. So I don't think that you should never, ever, ever, ever, ever pick individual stocks. But I think that if you can't discuss at length the corporate values and what the company does and tons of information about that company, why do you think you should be investing in that company? If you don't have the time to do the research, why do you think they deserve your money?

Yeah. And I just want to echo, I agree conceptually. You know, I invest in index funds, essentially all of my stock portfolios in index funds because I do not believe that I can generate those outsized returns. I do not. That's not me saying I don't believe it can't be done. Clearly people can do it. It just takes an elite level of commitment.

And, you know, an obsession perhaps to the same level that we obsess over. real estate. A lot of folks and the real estate community, perhaps even more so in the public markets with that. So Carl, to the bring up the next question, what is the next 100-bagger stock that we can invest in currently over the next eight to 10 years? So we can skip all of that research. Yeah. I just want to emphasize, even though we've had this, and I'm going to say an important four-letter word here, that's not a bad one, but that ends in CK. It is luck. and I just happen to be a nerd who read the right things at the wrong time. I might have had a little bit more insight because I could tell you all about how the dry

electrode battery process works at Tesla and what advantages that gives or maybe why Google's search dominance could happen. But Tesla could be disrupted but tomorrow by a solid state battery that someone comes up with or Google might be being disrupted right now by chat GPT, these AI, things that have sprouted up on the internet recently. So even though I've got lucky, I, very skittish. All our money is going towards index funds. And I want to make that abundantly clear of.

Do as I say, not as I did. Is that what dad say? That sounds like a dad thing. You're a dad. Hey, kid. Don't do as I, yeah. Let's get a sense of proportion on this. So how much, you know, could you give us maybe a relativistic sense of the percentage of your net worth that you invested and the percentage of your net worth that the,

winning tech stocks became? It was pretty small initially because they were small things in my post-tax portfolio. Both of our investments, most of the money we put in were through 4-0-Ks and Roths. And with those, they were mostly into some kind of fund, which I transitioned to index funds. And the main reason for that was I couldn't invest in individual stocks because it was a company 401K. So the amount of money we put into stocks, was very small, but at its peak, it probably consumed about half of our portfolio. Yeah, about 50 percent. And that has since changed.

Cue the scary music. Yeah. Okay. So these small amounts of money, five thousand bucks at a time at first, maybe a little bit more as the years passed, really became hundreds of thousands, millions of dollars because of the incredible returns of these companies and a huge part of your portfolio, which which has waned a little bit because the markets come down in particular in 2022, particularly hitting some of these winners, but it's still 100x return in some of these categories, 10, 20, 30x

returns on some of these individual stocks over the last 10 to 15 years. Yeah, that's correct. Despite what has happened recently, we have still upperform the index funds, which is pretty rare, and I don't think it's repeatable. I also don't think to something you alluded to earlier is it's probably not. not sustainable. Every company usually goes by-bye, and it's very hard to predict one that tide is going to turn.

I think the average length of a company now is like 20.7 years, and it's actually decreasing. So good luck, even if you do pick a winner, good luck knowing where to step off that winter. Well, safe to say there was a big win here, regardless of whether we missed a peak or it's coming back or whatever. Who knows the future with that? Walk us through how this relates to real estate and maybe introduce. to some of the events in 2022. Well, we were not looking for a house.

And a house popped up in our neighborhood where the neighborhood that we live in is a desirable neighborhood in the city. So we knew that the, and I'm a real estate agent. I'm able to run the comps easily because I have access to the MLS. And I knew that this house was at the price that we were negotiating it, it was going to be a really great. and we decided that we wanted to purchase this house. It's directly next door to a friend of ours, and it's a ranch-style house. Our current house is a split level, and it has stairs everywhere. It's got four levels.

Four levels of stairs. There's just stairs all over the place, which is great if you have little kids and not so great if you are 97 years old trying to live around your house. Our main level doesn't have a bathroom. It doesn't have a bedroom. So it's, you have to get, you have to use stairs to get to any of this stuff. And we decided a ranch would be much better. So we negotiated a really great price on this house and we bought it with a margin loan.

And back when Tony Robinson was on the podcast, Tony Robinson is the host of the real estate rookie podcast, he casually mentioned the concept of a margin loan. And I asked him for more information about that. this. And I sent Carl a note. I'm like, do you know you can take out like essentially a he lock against your stocks? And Carl said, I've never heard of that. He did some research and discovered that Tony was in fact telling the truth, not that I was doubting him. I had just never heard of this before. So we gathered up all of our portfolio into one location and had the opportunity to take out a margin loan, I think our margin at the time was around $1 million.

That was the amount that we could borrow. And we ended up borrowing $500,000 to buy this house. Actually, it was a little bit different. I want to jump back to something you alluded to. It's a ranch, and we intend to move into this house once our kids are out in six or seven years. But, yeah, we had enough margin in there. So after we borrowed the initial $500,000 to buy the house, we still.

had one million in buffer, which I thought would have been enough. Again, cue the scary music. Oh, we had. Oh. Oh, I thought there was only. Okay. Yeah. What was the, so you could have borrowed up to $1.5 million and you borrowed $500,000 with the ability to go up another million if you needed to, right? Yes. I should have taken a screen capture, but I believe it was right around there. Awesome. And then, and what was the interest rate on this, on this? Because I was, Tony said there very attractive interest rates, like very, very low. Yeah, so interactive brokers is the company best known for offering these kind of arrangements, this line of credit against your portfolio.

But then I called each rate and said, what can you do? And they gave me an even better rate and a lot of cash to transfer our money over there. So at the time we bought the house, it was a little bit over 1%. So we could borrow money like, I think it was like 1.2% or something like that. But again, cue the scary music. That rate is variable. Yeah, and it's not variable like an adjustable rate mortgage, which goes up every, what is that, every year? This goes up every month.

Or no, every day. It can change. Oh, it can change every day? It can change every day? It can change every day. This gets worse every time you talk. Don't talk anymore. We need to have better money dates to discuss this stuff.

I'm sorry. I feel I'm liable for not full disclosure. Okay. So we're on top of the world. It's early 2022. Stock market is, wealth has never been higher. Um, these, these, you know, big, big tech stocks have exploded in value over a decade and are really at incredible valuations. You're, you're borrowing, but it feels like an incredibly conservative amount to borrow, um, against, uh, because, and it's an incredibly attractive interest rate.

So this all makes perfect sense. You can't argue that any of this at this point is, is a, is a, uh, even, even somewhat irresponsible financial decision. Why, why are we queuing all the scary music? what happens next? Well, what happened next is inflation happened next, and the Fed started raising rates to combat inflation, and those rates are tied to the rate of the line of credit. And the other effect of this is when rates start going up, money flows out of growth stocks, which are mostly the tech stocks that our line of credit was against, and flows into other things. So I think the S&P 500 was down like 22 percent in 2022, but

I didn't actually check to see what the NASDAQ was down, which is mostly tech focused, but I'll bet it's down quite a bit more. Tesla was down 80% if you're keeping score. I like what you said, Scott. We were taking what we considered to be a very conservative position. Yeah. And the danger to a margin loan is that the money you borrow is collateralized by the money, by your investment. So if those stocks go down, each trade is eventually going to get to a position where they're unhappy

because they've loaned you $500,000 and then all of a sudden your stocks are worth like $550,000 or something like that. I'm just pulling numbers out of thin air here, but you have to maintain a certain amount in there, and if you don't, they will start selling your investments, whether you like it or not, and paying down your loan for you

because they want to make sure they get paid back. And that process we are referring to as getting called out of our loan. So I don't know what the action. phrase is, but we didn't want to get called out of our loan or have our stock sold for us. So to give an example here, if I have a million dollars in Tesla stock at the beginning of the year and I borrow against that, I could borrow up to half of that potentially at these really attractive interest rates, so 500 grand. If Tesla stop drops 80%, now all of a sudden, I'm borrowing $500,000 against $200,000 in stock, I'm either going to be on the hook for bringing $300,000 or really

probably $400,000 to the table. So my loan is half of my stock value, which is now 200,000, 100,000. Or they're going to start selling my Tesla stock for me in order to recilateralize that loan. And they're going to really start doing that before I get to that point. So if it drops to 800,000, they're going to say, we're going to start doing that until your margins 400,000. And they're going to do that on the way down, on the way down this journey. This is something you thought, we're going to completely avoid this risk in its entirety because we're only borrowing one third of the value. But when Tesla goes down 80, percent, that begins putting this pressure on even the conservative loan you took against

the portfolio. Is that a correct way of phrasing this? Yeah, that is exactly right. And to add pain to our pile, e-trade and interactive brokers value your holdings differently. So if all this would have been in like VTSAX, like an index fund, they would have allowed for a bigger line of credit and they would not have been as aggressive with calling their money back because those investments are much. less volatile than Tesla or Amazon.

Awesome. Okay. Well, not awesome, but I think we understand the concept here. What happens next here? What happens throughout the rest of 2022? And how do we resolve this problem that's beginning to compound? Yeah. So the one thing we did do is because we're so conservative, even though we did have a huge buffer. And this will come into the story a little bit later. We went and got a helock against our primary home. We're like, I think the chances of us getting called out are so small, but I really, really don't want to be forced to ever sell anything. So let's get a helock just in case this rare, rare scenario does actually happen.

By the way, I want to point out something else here. This is also probably scary because you have 100x capital gains in some of these stocks, right? And so if you had to sell those stocks, not only having to sell that stock and pay off the loan, you've also got to claim these incredible amounts of gains, which are then taxable, right? SAC puts compounding pressure on the situation as well, right? Yes, we were really, really, really anxious to not sell stocks in 2022 calendar year. So I think it was August. We went and opened up a helock locally and just in case we didn't think we would need

any of it, but we wanted to be able to pull money out of the helock, throw it into this loan to buy ourselves some time to think instead of having to make a snap decision. Because I think the way that it works is once you go below this, whatever the threshold is, you have three days to put the money back into the account where they're going to start selling your stocks. And we wanted to have more than three days to think. So we took out a he lock. They gave us, I think, $108,000 on against our house. And we didn't, We opened the helock. We didn't take any money out yet.

We were just waiting. The one thing I was going to say about a helock is that can be scary, too. We had a helic on a house when 2008 happened, and the bank actually said, oh, you can't have your helic anymore because house prices have declined. We're going to close it. Yeah, we're going to close it whether you like it or not. So, yeah, you never know what's going to happen to your, you make backup plans for backup plans. So how did the situation end up resolving? We took out, was the heloq's efficiency?

to cover the margin that you needed? Yeah, so this was a good roller coaster of a ride, but the down part, in this case, most roller coasters are fun going down, but with your stocks, it's not fun going down. The up part is more fun. Yeah, Tesla really started to go bad, probably towards the last quarter of the year.

Musk had to sell a bunch of his own shares to buy Twitter, which I don't think he wanted. to do and his SpaceX shares. And that caused people to freak out. He also went a little off the wall on social media. And I think people lost faith in him. And the money just poured out of the stocks. And that combined with other ones as well,

the big outflow of money from growth stocks. We were really, really close. And I think we have dates in our spreadsheet here. Yeah. So on 1222, it was getting a little bit close. So I went to the bank. I did the walk of shame with my head down. to the bank person and wired $80,000 from our HELOC over to e-trade to make sure we wouldn't

have to sell a stock. And I'm going to say something real quick, which I should have said before. I never like to sell stocks. I like Worms Buffett philosophy. If you do buy a stock, your holding period should be forever. And if you don't think you should hold the stock forever or you can, then you shouldn't buy it in the first place. So the thought of having a solid stock really did not sit well with me.

On this note, I want to just dictate for one second here. I feel like we've had a couple of folks who have this, I'm going to call it an air quotes problem, where they've made a single investment that ends up being a huge percentage of their net worth. So it sounds like that was Tesla for you guys, or maybe some of these other tech stocks. We had a gentleman many episodes ago on the podcast who had a condo in San Francisco we held for 15 years, and that just skyrocketed and value and became, you know, when you have something like that, that's the, you know, the bulk or a huge percentage of your net worth. but your philosophy is index funds, you know, because things have evolved at this point. How does one think through exiting that approach? So, you know, like how, because there's tax ramifications, right? If you have a million bucks in Tesla stock, if you want to sell it, you got to pay 200 grand

in capital gains tax, you know, rough give or take. So do you have any thoughts or advice for folks that might be struggling with that problem conceptually? Yeah, it's a really good problem to have. And I have two thoughts. The first thing that's Tesla specific or any stock specific. is that the stock price itself is a reflection of the company, but it might not be the most accurate. There's macro things that happen.

The CEO goes off the rails occasionally. There's recessions. If you really follow the stock, you should be following, you should never follow a stock. You should be following the business. And if you still believe in the business, who cares what the stock does in the short term. On the other hand, yeah, it's a dangerous position to be in because, What's the old famous Rumsfeld quote? There are known unknowns and known unknowns and there are unknown unknowns.

You don't know what unknown, unknown, unknown is going to come out and topple your castle or company or stock. And you're probably not going to see it until it's too late. People thought Steve Ballmer left at the iPhone and now where's Windows phone. So I think if you do have a big amount, I would, like capital gains start at like $84,000 in income. I would try to slowly liquidate your portfolio and maybe try to maximize capital gains. I think that's a moving target too. Who knows what capital gains are going to do in the future. And if the company does go to zero, you would have wished you would pay those capital gains

instead of holding on to the company to maximize your tax benefits. But is that what we're doing? We are not doing that yet. And my thinking is we're very fortunate. I feel so ridiculously lucky to be able to say things like I'm about to say. And that's if any of our individual stocks or all of them went to zero, it wouldn't change our life. It would still be great. And I'm so thankful for that.

So I don't feel the pressure that some people have. I know two people in my personal life that have like 95% of their wealth tied up in Tesla. And the other 5% isn't that much. So if you're in a situation like that, that's extremely dangerous. If it did go to zero, it would ruin them. But it's all a personal decision. But, yeah, I'm thankful to be in a place where if this crazy thing did go to zero, it would be fine. But, yeah, eventually there will come a time when we will start unloading it, maybe even this year sometime, although I don't think so.

I'm still confident in the fundamentals of the company. Scott, I could tell you hours about dry electrode battery technology, but I'm sure you don't want to hear that. And nor do your listeners. Next time. We'll have a BP money special, four hour special on dry electrode batteries featuring Carl Jensen. Thank you. Yeah, we're looking for that.

Yeah, I'm not able to make that recording. Sorry. Well, tax season is one of the only times all year when most people actually look at their full financial picture, including income, spending, savings, investments, the whole thing. And if you're like most folks, it can be a little eye-opening. That's why I like Monarch. It helps you see exactly where your money is going.

And more importantly, where your tax refund can make the biggest impact. Because the goal isn't just to look back. it's to actually make progress. Simplify your finances with Monarch. Monarch is the all-in-one personal finance tool designed to make your life easier. It brings your entire financial life, including budgeting, accounts and investments, net worth, and future planning together in one dashboard on your phone or your laptop. Feel aware and in control of your finances this tax season and get 50% off your Monarch subscription with the code pockets. What I personally like is that Monarch keeps you focus on achieving, not just tracking. You can see your budgets, debt payoff, savings goals,

and net worth all in one place. So every decision actually moves in either. achieve your financial goals for good with Monarch, the all-in-one tool that makes money management simple. Use the code pockets at Monarch.com for half off your first year. That's 50% off at monarch.com code pockets. You just realized your business needed to hire someone yesterday. How can you find amazing candidates fast? Easy. Just use Indeed. When it comes to hiring, Indeed is all you need.

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Get more with Northwest Registered Agent at Northwest Registeredagent.com slash money-free. At Desjardin, our business is helping yours. We are here to support your business through every stage of growth, from your first pitch to your first acquisition. Whether it's improving cash flow or explore. investment banking solutions with Desjardin business it's all under one roof so join the more than 400,000 Canadian entrepreneurs who already count on us and contact Desjardin today we'd love to talk business I so let me ask you this question on the margin loan concept I thought that was really attractive when I heard Tony Robinson say it and I I wonder still you know in spite of hearing the story that

you guys guys have shared if there's still not a use case for that product and I would ask you know maybe you put yourself in the shoes of me or another investor who's a heavily index fund investor with a large after-tax brokerage position would you consider doing the same strategy using up to one third of your margin capability which is probably one-fifth or one-eighth of the portfolio value from a margin loan perspective to finance to use that as kind of like a mini-heelock even in today's environment or would you really shy away from this tool altogether giving

in your experience. I would do this again. I think that we are, it's so hard to use the word victim because we are not victims at all, but we're just the victims of bad timing. If we had done this two years ago, we would look like geniuses. Our margin, like we also keep track of our margin. We weren't, the margin spread, like every day. We weren't shocked when it was all of a sudden we need to throw HELOC money at this because we're checking it frequently. This is something that we want to be aware of because we don't want to get called out. And I think that something that you need to be honest with yourself is if this is something that you're able to do, are you going to be checking it frequently? Are you going to have a backup plan and a backup plan for your backup

plan in case you get called out? You have no idea what the stock market's going to do. Just because it starts going up again doesn't mean it's not going to crash. the next day. And we have a backup plan for our backup plan and we've got the HELOC and we have 401Ks that we can borrow from and we have lots of other things. We could just sell stock. We don't want to, but we could if we had to. So I would absolutely use this again, just not right now because there's no money left. Yeah, I've got a I've got a couple of things to build on that. Despite our tail of woe, if you can even call it that, our rate of borrowing now is 5.5%. And that's still jarring. It went from 1.2 to 5.5%. But we couldn't even get a conventional, like, primary

home mortgage for 5.5%. So it's still a great rate, historically speaking. The second thing I'll say is margin loans are fast. You can press a button and have access to, in our case, $500,000 the very next day. So if you see a deal that you need to pounce on and there's an advantage to coming up with cash, you can have this and you can have it quick. And I think, That's why we got such a great deal on our property. We're like, hey, we can close like next week if you want. As soon as title comes back, boom, we are done. And you could use this as a temporary thing, too.

Do the margin to buy a house or whatever investment it is and then just pay that off and switch back to a conventional loan or sell stocks or whatever. So I would absolutely use it. It's a great tool. The last thing I'm going to say is a bigger pockets money listener actually got in contact with me after the first time we talked about this, and there are strategies to mitigate this, especially if you're on interactive brokers. I can send you a link if you all do show notes, and you can put it into that.

But if I was on that, I didn't even understand what this guy was talking about. It's pretty sophisticated, but Big Earn, early retirement now is hyper smart about this. So if I were going to do this, I would look at his blog post about how to mitigate some of that risk. Okay, great. We'll link to that at the show notes at BiggerPockets.com. Money Show 376. And yeah, I think what I'm hearing you guys say is, look, we made a set of rationalized decisions that to us seemed very reasonable, very probability-weighted, very, very thoughtful

throughout this situation. And we borrowed against the cheapest source of capital, which was this one, one-and-a-quarter ridiculously low interest rate margin loan. We thought with a degree of safety. We also had other pools of emergency last resort capital if we needed to get that from our house, for example. And that that didn't work out in 2022. And, you know, when we talk about thinking in bets, you know, that's one of my favorite books by Annie Duke. This is a thinking in bets exercise. This is a bad outcome. Good decision. And this is something that you would do again.

And that if you did it, if you do it over the course of 10 years, 9 out of 10 years, this is probably going to work out as the cheapest source of capital to use to finance a rental property in your situation. And therefore, it makes a lot of sense. But once every while, you know, have to know when you're playing poker, someone's going to have that better hand, even if you are betting correctly on that. And you have to have your way out so it doesn't actually, you know, because you can't play a game where you're going to go BK once every 10 years, even if it is mathematically probable to get rich. You didn't do that. You had your backup plans. And that's what I'm hearing you say is, yeah, absolutely, we do this again. Just a little bit of bad luck this year in

2022. We were able to move through it. And it's still a great tool. Does not disprove the use of the tool. Is that a good way to phrase it? Yeah, that's exactly right. There's a good John Maynard Keynes quote that I always think about in times like this. And it goes, the stock market can stay irrational longer than you could stay solvent. And yeah, I never thought that would apply to me until I did. Awesome. So has your strategy for the property that you bought changed at all as a result of this?

Do you think you're going to still hold it as a rental? Yeah. It lit a fire under our butts to get it done sooner than later. So it starts generating income instead of taking all of our current income to have money to it. our scope did expand a little bit due to issues we found with the house and a couple other things. But yeah, I think we're still going to do the exact same thing. Just, yeah, I'm going to get over there. Right after I'm done with this, I'm going to be working the air compressor, nail gun. Scott, if you're not doing anything, if you want to come up. I learned some home improvement.

We'll do that. We'll do that at the same time as we record that four-hour dry battery podcast here. Oh, yeah, you guys could talk about the dry batteries while you're working on the house. No, it sounds wonderful. So it sounds like you guys, it sounds like, it sounds like Doesn't change anything. And maybe a lesson there to learn as a takeaway as well is, you know, if you are able to get a really attractive source of financing for a property, but there's a variable interest rate or it's a non-traditional source of financing, maybe you should still run the numbers on that property with more traditional rates, you know, at that, you know, at the rates, maybe current 30-year mortgages or even with a little bit of a buffer, make sure it's

still cash flows in case there is an issue that requires you to rearrange your financing because that may change the return profile. And it sounds like in this case, it still works, even with the higher rates. It does. It just doesn't work as well. But, you know, some of the advice that I see in the Bigger Pockets forums over and over and over again is have multiple exit strategies. And we did. We had the plan is to have this as a medium-term rental because the neighborhood doesn't allow for short-term rentals, have it as a medium-term rental until our kids move out of the house, and then we will move into it because it's a better retirement house than our current house. We could sell it. We could turn it into a long-term rental. This neighborhood commands good

rent rates. So even a long-term rental would make sense. Short-term rental is out. It's a flip. We could sell it just outright if we decided that we get to the end of it and it doesn't work out. We can just sell it. There are three exit strategies and we're going to move into it. We could technically move into it. It doesn't quite fit our family. It's a smaller house than what we have now. But if we had to, we could move into it as well and then sell this house. And Scott, I'm just saying Longmont is a wonderful place to raise a family, especially one kid, one cat families. If you would, yeah.

Yeah. Are there any babysitters available in Longmont? Oh, conveniently enough. Yes. Awesome. I live with two. Longmont's a wonderful place. So one day on that.

And on a half serious, half-lighthearted note, Carl, I am kind of curious about the batteries that Tesla produces. Is there a good resource we could link to in the show notes there for folks to learn more about that? I'll think of a good one and send it to you in the show notes. There's a podcast called Tesla Daily. Rob Mallory is awesome. And yeah, he goes all over it. I think it's like that recording might be four hours long. But if you're really into it, he makes the bull case for Tesla.

Perfect. I can just imagine you listening to that while. while patching the drywall at the new property. It's absolutely riveting. To me at least. Oh, that was a great pun. That was a fantastic one. Anyways, Mindy and Carl, thank you very much for coming on the Bigger Pockets Money podcast.

Is there anything else that you want to share about this story before we conclude? I want people to know that they should be extremely conservative when they're doing financial monkey business like this. What we did was absolutely legal, but there are elevated risks with this. this elevated level of financial monkey business, I guess, is the really great way to phrase this. So be conservative. If we would have taken out the entire margin, we would be hosed. We would have been selling stocks a long time ago. Have backup plans for your backup plans and maybe a third backup plan.

If you don't have to use them, great. you just had an exercise in creative thinking. If you have to use them, you're going to be so thankful that you were able to think about it calmly as opposed to, oh, my goodness, I'm in a panic. I have to do something. Let me react instantly. That's never when you're making your best decisions. And Scott, I'm just curious, what is your cat's name?

Cat's name is Fred. Fred, okay. Fred has made a handful of appearances on the Bigger Pockets podcast, but when I have to record from home for various. reason. Nice. Yeah, our situation didn't turn out exactly how I thought it would be. It's a lot different.

But my worst case scenario, having to sell stocks hasn't happened. That doesn't mean it won't happen yet. By the way, our buffer with the marginal loan. I checked it before this recording is back up to almost $200,000. But the thing is, it doesn't matter what the average of it over the six months of it was. It matters what it is on a very specific point in time. And yeah, that's the hard part. over the long term, it'll be okay.

Are you repaying the margin loan at this point? Is that a personal finance priority? Nope. After we get the house rented, though, every dime from that sucker is going to go right back into the margin loan. Yeah. That is one thing I'll call out, actually, before we conclude, is when you take out a margin loan or a he lock, I think you should think about it as a short-term debt.

I like to think about it as, if you're thinking about this as a five-year or longer loan, something's wrong, in my opinion. So that means if you take out 60 grand on a margin loan or helock, you'd be thinking about not just the interest you're paying, but $1,000 a month, $60 months, right, over five years, a thousand dollars a month that you're repaying to that principal balance. So if you buy a rental property, for example, let's say they bought this property for $500,000, with a $380,000 mortgage and a cash flows, $500,000. after that mortgage. But you also used a margin loan, even if that margin loan was at zero percent interest for $120,000, you got to pay back $2,000 a month. So this property's going to suck $1,500 out of your life every month in that case with both those sets of financing for the next five years. And this is where people get themselves into trouble with these short-term financing instruments

buying long-term investment properties. You're not going to have that problem because you only used this one loan to buy the whole property with that. But that's something that you want to think about as a listener, if you're thinking about financing properties with two types of, you know, a debt, a long-term debt and a short-term debt, because that interest rate is going to be deceive you into thinking it's great financing, but it's really going to be created a tremendous amount of pressure on you for several years. Yeah, I can see somebody taking it out, taking HELOC out, and then since that's against their personal house, they're paying it back with their personal money. You should be paying that back with your rental money. And if your rental money

can't cover that, then is it really worth buying that rental property? I think investing should de-stress your life with each incremental asset, not put compounding pressure on you until you reach these breakpoints three to five years out. Wow, do you feel seen? I should have talked to Scott like eight months ago. Well, great. Well, guys, thank you so much for coming on the BP Money Show. This was wonderful and really, really appreciate it and hope to have you back to discuss,

you know, a big winner next time, you know, next year. Let's do that. That sounds great. Thanks for having us, Scott. We had a great time on the Bigger Pockets, Money podcast. Thank you, Scott. Please say hi to Fred for me. We will, we will certainly do that. And kiss your baby for me. Always. BiggerPockets Money was created by Mindy Jensen and Scott Trench, produced by Kaelin Bennett.

Editing by Exodus Media, copywriting by Nate Weintraub. Lastly, a big thank you to the Bigger Pockets team for making this show possible.