How Wealthy Investors Buy Real Estate Without Selling Stocks: The SBLOC Strategy

Christian: [0:00] Hello, hello, and welcome to another episode of the Awesome in Seattle podcast. This is your host, Christian Nossum, with the Awesome Nossum Group at Wilson Realty Exchange, Inc, and today I'm with my co-host and co-agent here at the Awesome Nossum Group, Mr. Varun Jain. How you doing today, Varun?

Varun: [0:15] I'm doing great, and I am very excited for today's discussion. You've seen me- Yes … in the last year, I've been telling anyone and everyone who would listen about adding this as a debt option to their real estate strategy, and this is SBLOC, which stands for securities-backed line of credit.

Christian: [0:37] Yeah, you're not joking. You talk about this all the time. I've heard you say this probably to at least 15 or 20 different people. That's when I'm with you, and I know you talk about it when I'm not with you. So yes, let's go over securities-backed line of credit. What is an SBLOC?

Varun: [0:56] Yeah. So, uh, SBLOC, as I mentioned earlier, stands for securities-backed line of credit. Um, it's an interest-only line of credit, uh, that uses your existing st- stock portfolio as an underlying asset to create the line or the loan. Think of it, um, as similar to a HELOC. A HELOC, or home equity line of credit, where the home is used as an asset to create a line of credit. Uh, SBLOC acts the same way, but instead of home, uh, your stock portfolio becomes the asset. One thing to note is just like HELOCs, HELOCs can range f- at, from all the way from 60% loan-to-value all the way up to 95%. SBLOCs have a range of 50% to 70% of the portfolio value. For example, if you have a million-dollar stock portfolio, your SBLOC could be 70% loan-to-value, which is $700,000 of line of credit.

Christian: [1:52] Yeah, that's awesome. Is there, like, a minimum portfolio size that you need in order to set up an SBLOC?

Varun: [2:00] Uh, it, it really depends on the institution you use or the bank you use. I anecdotally have heard, like, 100K to 250K is a good starting point. Obviously, larger your portfolio, larger the line. The best part about SBLOC is the line continues to grow as your portfolio grows.

Christian: [2:19] Yeah. So let's talk about institutions. Where do you recommend that someone goes in order to set up an SBLOC? And does it-- Like, how, how much do they cost? Is it pretty expensive?

Varun: [2:31] Yeah. So m- most banks like Chase, Bank of America, Wells Fargo, uh, do have an SBLOC product. Mm. They might call it something different, but end of the day, it is securities-backed line of credit. Other institutions like Fidelity also have similar products, uh, which is, uh, again, different names for the same thing.

Christian: [2:50] Mm-hmm.

Varun: [2:51] Any institution that has a trading platform should be able to offer this product. Uh, but yeah, shop around. Uh, they all have different rates, but the cost is usually either negligible or zero. Mm. I have now set up the SBLOC twice, and I have not paid, uh, a single dollar for setup or closing the line, uh, in the last six, eight years that I've had SBLOC active. So yeah, it's a great tool. Oh,

Christian: [3:20] that's awesome. So the cool thing, in my opinion, about an SBLOC is you have this big stock portfolio. Normally, if you wanna spend the money, you have to sell your stock. This allows you to get a line of credit against it, so you just-- your stocks keep growing, hopefully, and you can just borrow against the equity you have in it. So let's talk about the logistics of an SBLOC. How-- What can you actually do with the money that you have in this SBLOC?

Varun: [3:50] Yeah. So, um, before we jump into that, I think one thing you mentioned that I want to piggyback on is- Yeah … usually what people think is, "Hey, if I want to deploy the equity in my stock into real estate, I sell it." But when they sell it, they create a taxable event.

Christian: [4:04] Mm-hmm.

Varun: [4:04] S Block allows you to borrow against that same portfolio or same stock. Yes, you're getting a lower value, but you're not creating a taxable event. You're borrowing, and that interest can actually help you offset some of your taxes because you can take a write-off end of the year. Now, to talk about how you can use the S Block. Um, when I set up my S Block back in twenty sixteen, twenty seventeen, it was a rainy day fund. I wanted to make sure I had access to a large chunk of cash in case something goes sideways, large medical bills, something, right? Random, um, rainy day fund.

Christian: [4:39] Mm-hmm.

Varun: [4:40] I only started using it for purely real estate purposes, uh, in late twenty twenty-four. However, in the past, I've used the S Block to buy a secondhand car, which traditional banks would not fund or the rates were very high. Uh, S Block was very attractive option for me. I used it for that. I've used it for down payment to purchase a primary home, and that worked out really well. But you can also use S Block for a really nice vacation, a fancy gift for you or your loved ones. Um, I am using S Block, as I said, starting twenty twenty-four, I started deploying the funds, uh, into real estate. So I'm using it for funding new construction as well as, uh, on my flips. The only restriction where you cannot use S Block is to buy more stocks or more securities. Outside of that, you have a free rein to spend that cash the way you see fit.

Christian: [5:34] Yeah, that makes sense. Yeah. So this seems like a really good alternative to, like, what I have to use because I don't have a giant stock portfolio, like a hard money loan if I want to do a flip or a new construction or something like that. So why aren't more investors tapping into this? Like it seems like a good chunk of compensation that tech employees, especially here in Seattle or San Francisco, they have is it's in the form of company stock. This seems like a no-brainer. Why aren't more people tapping into this?

Varun: [6:05] You hit it on the head. It is a no-brainer. A, um, the main issue here is awareness. Like I, I'll give you an example. In the last year, you mentioned this, I've been telling everyone I can about the securities backed line of credit. I have nudged/helped six people who are already in the tech industry who were not aware about this product being available to them set up that line, and two of those six I know have already deployed that on their real estate, uh, investing journeys.

Christian: [6:35] Right.

Varun: [6:36] So again, it's, uh, comes down to awareness. And, uh, even in a tech hub like Seattle, a lot of people are aware about HELOC as an option because it's more popular.

Christian: [6:45] Mm-hmm.

Varun: [6:45] Uh, but SBLOC is not as popular, so it's, it's just about getting the word out there on this being another asset class that they can use.

Christian: [6:53] Yeah. Yeah. And I've seen, I mean, you and I both know numerous tech/former, recently former tech employees that have gotten into real estate investing and out of tech, or maybe they're doing tech, you know, as their real job, but then they're doing investing on the side. Um- Yeah … and they're the ones that this just makes so much sense for. Yeah, just makes a lot of sense. So-

Varun: [7:16] Absolutely … Speaker: I kinda… This, this reminds me of the DSCR loans a few years back. When they just first came out, people didn't really know much about them, and then it just kind of blew up, and now a lot of people use DSCR loans. Um, which is basically, has nothing to do with what we're talking about here. It's a loan where they don't look at your personal credit or how much money you make or anything like that. They base the loan off of a performing rental, so they… It's called a debt service coverage ratio loan. So the income from rentals has to exceed how much your monthly payment would be and stuff like that. So quick tangent there, but what are, what are some of the risks associated with using an SBLOC? Yeah. So like any investment or debt, there is risk associated with SBLOC as well. The easiest way I can explain this is using an example. Let's go to the previous use case, stock portfolio of $1 million and an SBLOC line of 700K. If you use up the entire 700K and the value of your portfolio drops to 800,000 instead of a million dollars, that's a $200,000 drop. Now, because you've used the entire line and the bank wants a 70% loan-to-value as a hard threshold, they can then turn around and start selling your stock, um, uh, to get to that 70% threshold because they need to protect themselves, and that's where they feel comfortable. So they will start selling stock. Now, there are two ways you can avoid that. One is if you have extra stock that you've not moved into this particular institution or bank, you can move that over to s- get back to the 70% loan-to-value. The other is, which I try to do, is not use up the entire line. If your line is, let's say, 700K, you try to use 400, 500,000 of it. Uh, it gives your, gives you a little more buffer in case there is a downturn in the stock market, and you can still kind of protect your stocks from being sold, uh, by the bank. So again, uh, just make that call so you are not putting yourself at risk.

Christian: [9:32] Yeah, that's, that's really good advice. You never wanna over-leverage yourself. That's not a good strategy. So yeah, make sure you are monitoring your finances closely as you grow your real estate portfolio and… All right, let me play devil's advocate. Why would someone use an SBLOC instead of a HELOC? We're using so many- Uh … acronyms here. Geez, I don't like it.

Varun: [9:53] Yeah. It is-

Christian: [9:54] So why would someone use an SBLOC, securities-backed line of credit, credit, versus a HELOC, a home equity line of credit?

Varun: [10:02] Yeah, great question. And, uh, it's not, uh, either/or. Uh, you can use both, and they work really well g- g- uh, they really, they work really well together. It's just another tool to have in your tool belt. Because I- I like SBLOC personally because the funds are usually available the same day or the next without paying any points, which is the case with expensive hard money loans. It's not a set value like a HELOC, and the value of your line, uh, grows with your a- portfolio without a reappraisal. Uh, which is great because if your… Let's say your portfolio goes from a million dollars to $2 million, you can get your line updated. Uh, o- one option is the bank does it automatically. They have a system in the back end that k- keeps reassessing your portfolio, or you just email them or call them, and pretty much within 24 to 48 hours they'll re-update the line and the amount you can pull out, which is v- much cheaper than getting a reappraisal and a new HELOC.

Christian: [10:55] Yeah.

Varun: [10:56] And then this is where it gets a little bit, bit technical, but it's important for someone to understand if you're seriously considering an SBLOC. S- SBLOC rate is set by… It follows the daily SOFR rate plus a small margin that is charged by the bank. That's what the SBLOC rate is. And SOFR is the rate at which banks lend money to each other, and this set rate is reset daily by the New York Fed. So, and SOFR also follows the Fed rate pretty closely because Fed rate determines the lower limit for SOFR.

Christian: [11:32] Mm.

Varun: [11:33] So the key takeaway is as the Fed rate lowers, the SBLOC rate will follow fairly quickly.

Christian: [11:40] Nice.

Varun: [11:42] So essentially what that means is this year, let's say, I don't remember how many times we've taken a rate decrease this year. Let's say assume two.

Christian: [11:49] Mm-hmm.

Varun: [11:49] The moment the Fed rate went down by 25 basis point, within the next day or two my rate dropped immediately. Hmm. It's not like the hard money loan, which if I get a hard money loan at 10%, I'm stuck with the 10% for the life of the loan.

Christian: [12:02] Yeah.

Varun: [12:03] Here, immediately I get a reset, and I'm paying a lower interest rate within a day or two. And I got lucky on my line because, uh, the contact I'm using for my line, uh, my current rate is below six. Wow. If Fed continues on their path of dropping the rate by another 50 basis by… points by end of the 2025, I will be very close to or at 5% by end of the year. That's a huge difference from the- Huge 10 to 12% on hard money loans.

Christian: [12:31] Yeah.

Varun: [12:31] And all of that extra margin drops directly to the bottom line when I'm deploying these funds for flips or new construction.

Christian: [12:39] That's awesome.

Varun: [12:40] Um, so again, it's a great way to leverage your current asset without having to sell it c- and letting it continue to grow. And, uh, this is just a great way to make your money work as hard as you're working as well, right? Mm-hmm. You are using debt at 5, 6%, 7%, deploying that hopefully in a project that gives you 30 to 40% return, paying off that 5% and pocketing the difference.

Christian: [13:06] Yeah.

Varun: [13:07] And that, that is essentially how I think is a, like a very good way to grow your portfolio.

Christian: [13:13] Exactly. In a very short amount of time too, with, with these kind of, you know, four or five-month long flips that you can do. Yeah. If you're getting, you know, borrowing at 5% and getting a 30% return, that's a, that's a good margin. That doesn't suck.

Varun: [13:26] Yeah.

Christian: [13:27] Yeah. Thank you, Varun, for sharing all of this. I would say if you are thinking you want to potentially set up an S block, Varun has an awesome contact that he can hook you up with. So if you wanna do that, reach out to Varun. You can email him, varun@awesomenossum.com. That's V-A-R-U-N @ awesome, the word A-W-E-S-O-M-E, and then Nossum, N-O-S-S-U-M.com. And he can hook you up with his contact. Um- Absolutely … I know your contact has some… I guess if you hook 'em up, they get a little bit better rate. Is that kind of what the story is?

Varun: [14:10] Yeah, because I, I got that offer and I told him, "Hey, I'll bring some friends-" Or if you can offer the same rates, and I've now referred eight people to him.

Christian: [14:18] Nice. Nice. That's

Varun: [14:20] awesome. And I, I don't get a cut. I don't get a cut.

Christian: [14:22] Okay. So if you are in tech or you have friends that are in tech, uh, that you think this might help, you should definitely share this episode with them so that they can get this set up and get some inexpensive, quote-unquote, money and tap into their, the equity that they have in their stock portfolio. Again, most people have never heard of this, and the ones that do or that have heard of it, they're utilizing it to make even more money. So it's, it's a fantastic way to go if you use it safely like we talked about. So yeah, if you're, if you're interested and you wanna learn more, uh, reach out to Varun. He can hook up with his contact, who's gonna get you a little bit better deal. And yeah, and we can help you also use that money to invest in real estate. Both Varun and I are active investors in the Seattle market. We are doing flips. We are doing dadu builds. We are… I- both have long re- long-term rentals as well. Like, this is what we do on top of being real estate brokers. So if that's something that interests you, we can also help you out with that. That's it for this episode of the Awesome in Seattle podcast. Thank you again, Varun. I really appreciate all of your knowledge. And yeah.

Varun: [15:36] Absolutely.

Christian: [15:37] Yeah. Thank you so much, and we'll see you on the next episode of the Awesome in Seattle podcast. Thanks for listening. See ya.

Varun: [15:43] Bye.