I learned how to do this through the process of working with banks to fund my own real estate ventures over the last several years. I thought I would give a brief summary of the idea so you have something in words to review.
Your brokerage account and cash values can be assigned to the bank as collateral, unlike 401k or Roth IRA plans. In return, they will supply you with a secured line of credit totaling roughly 75% to 80% of your brokerage account and 95% to 100% of your cash values. The bank will lend this money to you at a very low interest rate because this is considered a secured debt just like your mortgage. Secured means that the bank has been assigned ownership of an asset larger than the loan they’re giving you. If you default on your mortgage payment, the bank can take your home because the home itself is the assigned collateral. In the mortgage paperwork, you assign the rights of ownership to the bank if you default on the loan, which is why they’re willing to give you such a large loan at such a low interest rate.
The same is true with brokerage accounts and cash values. Rather than a home securing a mortgage, the investment account is securing the line of credit. The bank knows they aren’t lending you more than what you have, and they’re comfortable giving you the loan at such a low interest rate because they know you’ve signed the rights to that investment account over to them. They’re willing to lend equal to what you have in cash value because they know the balance is guaranteed to increase year over year; whereas, they only lend up to 75% to 80% of your brokerage account because they believe the balance will fluctuate due to being invested in the market.
A line of credit at 3.5% is what I currently have with the bank. Rather than cashing out of my investments, which would involve paying capital gains taxes and no further returns in the market, I would leave the money invested in my brokerage account and let my cash values continue to grow as well. I would then take a loan against those assets at a 3.5% interest rate. I would then use those funds for the down payment of whatever income producing property I’m purchasing. Once you complete the down payment, the property itself serves as the collateral for the remaining 80% to 85% (depending on the terms you can negotiate) that needs to be financed, just like a normal home purchase. The income from the property should be enough to pay the interest on the 3.5% line of credit, and enough to service the property expenses, taxes, mortgage and interest payments, cleaning fees, etc…
If the income from the property allows it to be self-sustaining, then eventually you have a paid for property that you never used any of your own capital to purchase that continues to provide passive income. In the meantime, I assigned my brokerage and cash values but never used them, so they continued to compound without being taxed and continue to grow with market gains and dividends during those years. Assuming those accounts average close to 6% on the low end to 10% on the high end, you would continue to gain a positive spread over and above the 3.5% borrowing rate on the line of credit. This positive spread compounding year over year is an additional return that you would otherwise lose if you just cashed out of the investments or used your own cash to purchase the real estate. Also, the properties I choose will generate enough passive income to service the interest only payment on the 3.5% line of credit, which means the growth rates of my invested accounts and cash values are not offset by the interest paid, giving me the exact same outcome as if I had never assigned the accounts as collateral and just let the accounts grow. In addition, as those accounts continue to grow, the bank will continue to provide up to 75% to 80% of the brokerage account and 95% to 100% of the cash value, which means more funds will continue to be available each year for other real estate investments as the accounts continue to compound.
I normally suggest you reinvest net profits at the end of each year by paying off the line of credit rather than merely paying the 4% interest only; however, of equal benefit would be to add those net profits to your brokerage account or cash values, which will increase your available line of credit. I usually look for properties that provide a net profit large enough to repay the down payment in less than two years. Once the down payment has been repaid, I let the tenant income service the regular mortgage, and move on to use the line of credit for down payments on other projects.
I know you may need to read this a few times before it sinks in, but I hope this is a clear explanation that helps you grasp the general idea.