Security Based Loans For L.A Real Estate

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Consider this type of financing product

Asset based lending & your next home purchase

Are you familiar with asset based or security based lending? You should consider this type of financing product if you have the ability to pay cash for your next real estate purchase or you have a substantial amount of savings in a brokerage or retirement account.

Its important to note that the first conversation with any large financial transaction should be with your accountant or financial manager to properly asses tax implications. Next, you should absolutely talk to a financial advisor or mortgage lender at a large investment firm like Morgan Stanley, Merrill Lynch, JP Morgan, CitiGroup, City National, Credit Suisse or Barclays.

The benefit with investment leveraged financing or a security based loan is simple. Instead of wiring the cash to escrow to be paid to the seller, you wire the cash for the purchase of your next property to an investment bank. The investment bank will then lend you that amount for the purchase of the property. Simply put you are leveraging the funds, while simultaneously buying real estate. This will mainly apply to anyone that has $500,000 in assets or more. The goal shortly after purchasing is to convert the asset based loan into a traditional long term mortgage product with more favorable terms than your local mortgage broker or bank.

A security based loan through an investment bank is a straight forward concept. For example, you want to purchase a 1 million dollar condo. You wire 1 million to an investment account with an investment firm like Morgan Stanley. Next, Morgan Stanley will allow you to borrow those 1 million for the purchase of your real estate property. In theory, you took 1 million and made it 2 million in a matter of days.

“While portfolio-based lending is not a new business, it has become newly explosive as a product on Wall Street. Glossy brochures implore clients to “unlock the value of your portfolio through a strategic approach that addresses both sides of your balance sheet” and “maximize the liquidity solutions available to you.” Retail investors are being shown a way to continue to ride the markets higher while increasing their spending power. A big part of the pitch is that clients incur no taxable consequences from the sale of any securities and they also won’t miss out on any additional upside.”

(Source 2 – Click Here)

"Defenders of the securities-based lending boom point out that wealthy people have always borrowed against their assets and that ultra-low rates make such offerings a logical option, especially compared to second-lien mortgages or credit card debt. And this is true. You could argue that the major difference between this credit boom and the last one is that subprime borrowers could not afford the housing loans to begin with, whereas high net worth investors already have the means to pay these loans back in the form of their investment accounts. "


What are the benefits to this style of leverage when purhcasing real esate?

1) Opportunity Cost:

First and foremost, you are kind of getting a 2 for 1 deal. You put 1 million into a strategically planned retirement account or long term savings account or purchase safe bonds, then you borrow what you put into said account for a real estate purchase transaction. Sweet. Simple. Sexy. Instead of placing all of your eggs into one basket, like the real estate purchase, and losing the opportunity cost of a retirement account and the stock market, you can buy real estate and invest in the markets.

2) Real Estate Transactional Leverage:

The purchase is treated almost like cash. Meaning, after you make the deposit with the investment firm they will allow you to borrow the funds within 48 to 72 hours, if approved. No appraisal or loan approval is required

Why is this considered transactional leverage? You can write a non contingent offer and close all day, except weekends, silly! Banks are usually closed Saturday and Sunday. But you can close quick, easy and painlessly Monday through Friday, but remember not on holidays.

3) Financing Terms (terms below provided courtesy of Alex Manolopoulos, CFA Morgan Stanley):

Lock in a long term rate significantly lower than the market rate.

Flexible liability management strategies to prevent unnecessary taxes and gains.

Engage Morgan Stanley professionals to assist in Asset and Liability management techniques which save money, add to returns and assist in comprehensive planning solutions.

Morgan Stanley caters to high net worth for better returns on cash, bonds, stocks and other investments. Morgan Stanley and most investment banks seek to compete aggressively for high net worth clients.

American Express cards with great perks.

Estate and Tax planning, etc….

0.20% off market interest rate for New Purchases (limited time)

0.20% off market interest rate for loan values of $1,000,000 or greater (limited time)

Relationship discounts for clients with accounts over $500,000, $1,000,000 and $5,000,000.

Morgan Stanley and most investment firms are very competitive and will match or beat rates for most Non-Conforming loans. We have great rates on a wide variety of loan products as well. 30 yr, 15 yr, IO’s, ARMS, SBLS’s etc…


What to look out for:

Over leveraging should be a consideration, which should be discussed in great detail with your accountant and financial advisor.

Asset based loans are a short term solution. The goal is to convert the asset based loan into a longer term mortgage product. You must qualify for the traditional mortgage loan. Lending hoops are no different at investment banks that at other banks. This is important to note. The benefit here is you are able to leverage your assets as cash vs actually liquidating them and shortly after purchasing converting the asset based loan into a traditional mortgage with more favorable terms than borrowing from your local mortgage broker or bank.

Morgan Stanley or investment banks may not charge a transfer fee but the bank it’s coming from may. Cash can remain at Morgan or investment bank of choice un-invested if you choose although cash isn’t returning anything. Small annual account fees are waived for typical high net worth accounts that secure loans or choose to invest.

Boom Shaka Laka!! You’re smarter and have an extra financing tool in your tool box. You’re welcome. That’s my whole drive – it’s to improve and help those around me. Simple. Thanks for reading, if you enjoyed this please share!


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