Posted by Kurt Schultz on November 17, 2006 at 12:38:32:
First of all, I’d leave the stock portfolio out of this deal. While some mortgage lenders (such as Merrill Lynch) will hypothecate against a portfolio, I think that would make this deal needlessly complex. Besides, if you leverage your stock portfolio that way and the stocks move against you, that leverage could squeeze you hard, really hard. Conceivably, if you got squeezed hard enough, you would lose not only your stock portfolio, but also your Real Estate.
Talking theoretically here, if you have an empty lot worth $700,000 and it secures $100,000 in debt, here’s what I’d try to do: get a 30-year fixed for 50% of the appraised value (50% is typical for an empty lot, go higher if you can; also, the higher the appraisal, the better here). With the $350,000 mortgage at, say, 7%, you’d have a fully-amortized loan that costs you $2,329 per month. Use $100,000 to pay off the other loan and invest the remaining $250,000 into a secure investment that pays you back more than it costs you. For an example, AmericaVest Capital Management has just launched a fund that pays 10%. If you were to invest the remaining $250,000 into that fund, it should pay back at least $2,083 per month. That’s a negative cash flow of $246, but wait - you don’t have to make the payment on the current $100,000 mortgage any more and that $246 might be less than what you are currently paying for the $100,000 mortgage (which would translate into a net savings for your monthly expenses).
Furthermore, with this approach, the lot would eventually be paid off (30 years from now), so the debt would eventually go away, but the money will would be invested in the fund and would continue to provide you with income.
You would be paying off your debt on the lot with (in part) other people’s money.
Also, once you set up a deal like this, what would happen if you sold the lot? Assuming that you got $700,000 for it, you’d probably pay $42,000 to agents and the $350,000 mortgage would get paid off (actually, what would get paid off would be whatever remains of the balance, but let’s call it $350,000), leaving you with a actual capital gain of about $308,000 - and you’d still have the invested funds that should still pay you a monthly check. At the point where you sold, your tax situation might get a bit odd (your taxable capital gains would probably be $600,000 minus whatever adjustments or exemptions you can qualify for), and you should seek professional advice on how to maximize your tax efficiency at (or just before) that point.
I don’t work for or endorse AmericaVest Capital Management, I am merely using them as an example for illustrative pourposes. You should find your own similar investment and be sure to do your Due Diligence. I have successfully done this kind of investing and have written an article about it, which is available here http://www.gioinc.biz/articles/mortgagecountermagic.html if you want to read about it - be warned that the article is California-centric.
This approach could apply regardless of whether you build a duplex on the property. If you do build and this kind of a system is in place, you should bring in money partners to finance the construction (because the mortgage would probably be tapped out) and possibly a construction partner to do the work.
Best of luck with it, it sounds like you’ve made a killing!