Around the Internet > Continue the Blog Conversation

Did I miss something in the newest MMM margin loan blog post?

(1/5) > >>

fizzgig:
Where does it talk about paying off the principal of the loan and how does that factor into everything?

RWD:
I think in this specific case his plan is for the friend to buy the place (with an actual mortgage) so he can pay back the margin loan:


--- Quote ---Then my friend would take her time to get a mortgage, and buy the place from me at a more leisurely pace – effectively just leasing it from me in the meantime.
--- End quote ---

secondcor521:
It also factors in because MMM is probably not holding the margin loan for very long.  There was another thread here (which I think gets referenced back to in the comments on MMM's article) where a poster basically asked "Why not use a margin loan instead of a mortgage?"

I personally think it's generally riskier because of the fact that a margin loan is at a variable rate and the possibility of a margin call at an unfortunate time;  these two risks are reduced if you only hold the loan for a short while or only margin a "low" percentage of your portfolio or both.

IIRC the other poster was wanting to hold the margin loan for longer and at a higher percentage than what MMM describes in his blog post.

Nick_Miller:
Uh yeah, I was taken aback by the article.

I was like, "you're taking out a margin loan of that size for a friend?" And MMM went out of his way to make it clear he doesn't want the house, so if the deal falls through with the friend, he's incurring transaction costs to sell to a third party, or else he's renting out a house right next to where he lives, or else he's holding and betting on a continuing rise in home values to set off the inevitable transaction costs.

It just seemed unnecessarily risky to me. And a little weird.

ericrugiero:
Yeah, the whole thing surprised me.  MMM makes enough blog income that the risk is a non-issue for him.  For the rest of us, it seems highly risky.  If you do a margin loan and borrow 30% (the limit is 50%) and the market drops 50% would you be able to sleep at night?  Knowing that the market dropping a little more would result in me automatically selling at the bottom would terrify me.  If everything goes well, it's fantastic.  Borrowing at 1% interest is a great deal.  Yes, things have to get really bad for it to not work out.  But, if things DO get that bad, it's a HORRIBLE time to sell. 

In the case of MMM, buying this particular home seems like a great deal.  If his "friend" can't get a mortgage, he can probably sell for a profit.

Navigation

[0] Message Index

[#] Next page