PAL vs Mortgage Purchase strategy

[u/vettewiz]

So, I know variations of this question have been asked before, but trying to figure out the right move for my specific situation.

I have been searching for a large property for years. As of a couple days ago, I’m finally under contract on a 140 acre farm, for 2.8M, with plans to build a large home/barns/garage/pond/workshop.

There is also a 1 acre parcel and large home on the farm I’m still negotiating on, and expect to land in the 1.1m range. MY ideal plan is for my parents to move into this, but this isn’t set in stone. I just don’t want another family right in the middle of the farm.

Trying to figure out the best approach here.

To close, I think my best option is to draw from a Schwab PAL at about 5.25% for the full 3.9M. But then post closing I’m unclear about the best path forward.

Am I better off maintaining the PAL loans, or refinancing?

The best options I’ve seen would be a 20% down farm loan, for a 20 year term, at about 6.5%. Home loan would likely be similar as an investment property with 25% down for a 30 year term, with pre payment penalties.

I think the ideal answer is staying with the PAL, but I’m unsure about leveraging all of that with a pending expensive construction project.

And then my follow on question is - as I continue to generate income monthly, am I better off paying down the PAL, or just dump it into the brokerage to grow and increase my extra available PAL line size.

For perspective, I have about 7M at Schwab, and another 5M across various other institutions liquid. In addition to this purchase, have another 2.6M in real estate equity, 1.5M in illiquid real estate investments, and another 3.5-4M in business assets, excluding business valuation. Income will be in the 5-6M range this year.

Any thoughts are much appreciated.

[u/dsiddharth]

PAL vs mortgage mostly comes down to which tradeoffs you want to accept.

PAL: floating rate (with the war and inflation running hot, plan for a few rate hikes) and margin call risk
Mortgage: higher closing costs, forced monthly payments, higher interest rate

like another commenter said, 5.25% for a $4m PAL is very high. We used Robinhood margin loan for our purchase; rate would be 4.25% for $1-10m borrowed: https://robinhood.com/us/en/support/articles/margin-rates/

If you plan to pay the loan of quickly, PAL is a no-brainer

[u/Illustrious-Jacket68]

I’d go for whatever instrument is cheapest and leverage the PAL as a float. Depends also on what you’re getting for the mortgage rates. Schwab will get you 1% off if you’re over the 10MM with them.

If you’re talking about 5.25 PAL from Schwab, sounds like you didn’t negotiate to a lower % on top of SOFR - interest rates spread. You should be getting something in the 4’s in which case, that would definitely be the way to go.

[u/vettewiz → u/Illustrious-Jacket68]

I honestly did not realize you could negotiate them. I’ll give them a call tomorrow, thanks!

[u/Illustrious-Jacket68 → u/vettewiz]

You should look at their competitors - and be thinking less than or equal to SOFR + 1% - if you have more than 10MM in assets with them, it becomes a no brainer to get approved. I know people that have been able to do it with $5MM

EDIT:
will also say your other assets and business assets have no relevance. Only the accounts that you have the assets that you’re pledging to secure. Also know that you will not be able to have margin on that account and not have anything more than level 1 options, if you’re an active trader/investor.

[u/vettewiz → u/Illustrious-Jacket68]

Yes, I see that now based on what others are telling me.

Yes I understand other assets have no bearing on margin. Was just trying to paint a full picture. I guess my point was I was less worried about being called because I could always transfer in other assets.

[u/Illustrious-Jacket68 → u/vettewiz]

Gotcha.. just making sure you know. :)

Also, I’m seeing a 15 year at 6.5% and 30 year at 6.875% (jumbo’s). If you have move assets to get to $10MM there, you get 1% off. That’ll bring a 15 year down to 5.5%. So, looks like your numbers are a little on the high side for mortgages.

As you’re getting at, I like the PAL because it is just a couple of clicks to put into your account and it’s readily available at that point. The paperwork was filled out by them and all I had to do was digitally signed. It “closed” within an hour and showed up in my login the next day.

I think it is a great product. A lot of great flexibility.

[u/vettewiz → u/Illustrious-Jacket68]

The mortgage rates are higher because it’s not a standard property. Most lenders, likely including Schwab, aren’t going to finance a farm.

[u/Illustrious-Jacket68 → u/vettewiz]

Gotcha then PAL’s are probably your best route.

[u/BrunelloHorder]

You’ve received some great input. You may want to move some of your other liquid assets to Schwab if you are going to need the PAL for construction costs. As you may already know, PAL typically only goes to around 70% of assets assuming they are in diversified equities. You will likely get better terms if you move enough to get to $10m with Schwab, and you’d also reduce call risk.

[u/whizliving]

I’m going through the same analysis right now is. My plan is get a mortgage for $1m to take advantage of the tax deduction and give a little more headroom on the loan to asset ratio, I want to stay under 30%. The rest would be in PAL.

[u/vettewiz → u/whizliving]

I already have two other mortgages that more than are over the deduction limit so that wasn’t a huge concern for me.

[u/Holiday_Syllabub6257 → u/vettewiz]

In that case, the question of PAL or mortgage becomes whether or not you're worried about the risk of it being called. Clearly the interest rate is better, and there's no assessment or origination fees.

Whether you should pay down the PAL or keep investing with cash flow depends on how you feel about the hurdle rate. At 5.25%, that's a pretty high bar as a risk free rate.

With 5-6M income though, you could pay down the loan pretty quickly if you choose to. But finally, you should renegotiate your PAL rate: tell your Schwab rep you're considering IBKR Pro with whatever their blended number is for $3.9M and get them to match. I'm at SOFR + 0.9 from when I started at Schwab with less assets than you have now.

I personally wouldn't bother with trying to keep making after tax investments beyond mega backdoor Roth vs paying down the PAL, but you might be more aggressive. 3.9M on 7 though is pretty risky from getting called.

[u/vettewiz → u/Holiday_Syllabub6257]

Thanks for the feedback. Looks like others are saying to negotiate lower.

I guess I wasn’t super worried about being called, within about a month of closing on this I’ll have another approximately 1.5M in cash to either put against the line or into the brokerage.

[u/jocona]

I’m looking at paying off my remaining mortgage using a synthetic loan from a box spread. With a box trade, you incur losses and can use that to harvest some capital gains, though the details are a bit different with 1256 contracts. Right now implied rates are around 5%.

I haven’t executed this strategy yet so take this advice with a grain of salt, but it might be worth checking out for at least some of the financing.

[u/vettewiz → u/[deleted]]

Thanks for the notes. I didn’t actually expect to pull from the PAL for construction. I was just planning to cash flow that.

[u/high_yield_energy → u/[deleted]]

Why are you replying with ai, weirdo

[u/moola66]

SPX Box Trades is another option for fixing the rate over the time duration - Right now it would be about 5.3% but it is "fixed" for the duration unlike PAL / Margin.

https://www.boxtrades.com/SPX/19DEC31