Commercial Real Estate Investing

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Brian Plajer
  • Rental Property Investor
  • Chalfont, PA
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Syndication Strategy using HELOC funds

Brian Plajer
  • Rental Property Investor
  • Chalfont, PA
Posted Nov 9 2022, 14:49

Hello,

I am interested in Apartment building investing however I am 52 yo and have a Full time job in healthcare, I have access to capital via a HELOC and was contemplating investing in a couple syndication deals. My thought process is, I can earn enough interest to cover the interest only payment for the HELOC and hopefully double my investment when the syndication refinance or sells. Has anyone gone this route using their HELOC?

thanks

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Mike Dymski#4 Private Lending & Conventional Mortgage Advice Contributor
  • Investor
  • Greenville, SC
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Mike Dymski#4 Private Lending & Conventional Mortgage Advice Contributor
  • Investor
  • Greenville, SC
Replied Nov 9 2022, 16:00

The current prime rate is 7% and headed to 8+% in the next two fed meetings. The difference between that rate and the IRR on the syndication is your net return.

Doubling your investment is an aggressive assumption in the current environment with high borrowing costs and declining values.

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John McKee#4 Commercial Real Estate Investing Contributor
  • Investor
  • Fairfax, VA
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John McKee#4 Commercial Real Estate Investing Contributor
  • Investor
  • Fairfax, VA
Replied Nov 9 2022, 17:38

I would say it's a bit risky in todays interest market.  Not only will your heloc rate go up, but the projected returns will go down as prices fall because of the interest rate hikes.  No one is going to buy a multifamily at a 3 cap when rates are are at 7-8%.  These rates are truly unprecedented and the transaction activity has slowed significantly.  

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Chris Seveney
  • Investor
  • Northern Virginia
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Chris Seveney
  • Investor
  • Northern Virginia
Replied Nov 9 2022, 19:17

@Brian Plajer

Can it be done, yes. One of the biggest

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Chris Seveney
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Chris Seveney
  • Investor
  • Northern Virginia
Replied Nov 9 2022, 19:20

@Chris Seveney

Hit enter too soon

What I was going to write was one of the biggest omissions I see when people do their due diligence is understanding tax consequence.

For example if a sponsor is paying as a dividend which is taxed at dividend rate compared to ordinary income on a k1 that can have significant consequences

If you are in the 37% bracket and were looking at a 10% return ordinary income it’s net less of an 8% return taxed as a dividend.

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Jim Pfeifer
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  • Dublin, OH
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Jim Pfeifer
  • Investor
  • Dublin, OH
Replied Nov 10 2022, 07:53

I think this can be an effective strategy depending on a number of factors - I do this type of investing both with my HELOC and the cash value in my life insurance (using the life insurance avoids the variable interest rate issue).

You need to make sure that the investment you are making will have enough of a cash on cash return to cover the interest payment - as several have said here, that is tougher now that interest rates have increased on HELOC's. I think it still could be an effective strategy if you have enough capital to pay the interest even if the cash flow from the investment doesn't - you could still be net positive on the investment when the deal goes full cycle and you pay off the loan and the accumulated interest. Having capital on the side to pay the interest just adds a margin of safety.

There are more factors to look at than just the interest rate spread between the loan and the expected distributions.  The interest on the loan will be coming no matter what - the distributions might not.  Many operators have frozen distributions as they learn to deal with higher interest rates and operating costs.  There will tax benefits in the form of depreciation and interest payments as an expense (consult your CPA).

I currently do this with investments with higher cash on cash returns and lower operational risk than multifamily because the spread on multifamily is lower or gone these days.  It really depends on how comfortable you are with the operator and their plan - because if you do this type of investing in an asset where the cash flow does not cover the interest payment, you are counting on appreciation rather than cash flow and I never want to count on appreciation.

This strategy can effectively create money from nothing - you borrow to invest in an asset, pay the loan and interest back and you either have cash or the asset and you have no skin in the game.  It's a great way to accelerate your wealth - it's also a way to get overleveraged and get into problems if you are not careful and intentional about it!

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Todd Dexheimer
  • Rental Property Investor
  • St. Paul, MN
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Todd Dexheimer
  • Rental Property Investor
  • St. Paul, MN
Replied Nov 10 2022, 08:23

We've had investors access HELOC's to invest in our deals before. Just understand that you are leveraging your home to invest in a leveraged asset, so you are putting out more risk.

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Thomas Rutkowski
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Thomas Rutkowski
  • Financial Advisor
  • Boynton Beach, FL
Replied Nov 10 2022, 10:04
Quote from @Jim Pfeifer:

I think this can be an effective strategy depending on a number of factors - I do this type of investing both with my HELOC and the cash value in my life insurance (using the life insurance avoids the variable interest rate issue).

You need to make sure that the investment you are making will have enough of a cash on cash return to cover the interest payment - as several have said here, that is tougher now that interest rates have increased on HELOC's. I think it still could be an effective strategy if you have enough capital to pay the interest even if the cash flow from the investment doesn't - you could still be net positive on the investment when the deal goes full cycle and you pay off the loan and the accumulated interest. Having capital on the side to pay the interest just adds a margin of safety.

There are more factors to look at than just the interest rate spread between the loan and the expected distributions.  The interest on the loan will be coming no matter what - the distributions might not.  Many operators have frozen distributions as they learn to deal with higher interest rates and operating costs.  There will tax benefits in the form of depreciation and interest payments as an expense (consult your CPA).

I currently do this with investments with higher cash on cash returns and lower operational risk than multifamily because the spread on multifamily is lower or gone these days.  It really depends on how comfortable you are with the operator and their plan - because if you do this type of investing in an asset where the cash flow does not cover the interest payment, you are counting on appreciation rather than cash flow and I never want to count on appreciation.

This strategy can effectively create money from nothing - you borrow to invest in an asset, pay the loan and interest back and you either have cash or the asset and you have no skin in the game.  It's a great way to accelerate your wealth - it's also a way to get overleveraged and get into problems if you are not careful and intentional about it!


 If you are leveraging the cash value of a life insurance policy for syndications, you really shouldn't be using a policy loan. You need the tax deduction for the interest expense. Policy loan interest is technically a personal loan and the interest is not tax-deductible. I recommend that my clients use a cash value line of credit from a 3d party bank. This way the loan can be a business loan and is secured by an assignment of collateral against the policy.

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Doug Spence
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Doug Spence
  • Investor
  • San Diego, CA
Replied Nov 10 2022, 11:45

@Brian Plajer I think this is a little too risky. A better strategy would be to self-direct an IRA or other retirement plan to invest in syndications.

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Taylor L.
  • Multifamily and Self Storage Investor
  • Richmond, VA
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Taylor L.
  • Multifamily and Self Storage Investor
  • Richmond, VA
Replied Nov 12 2022, 13:15

High risk. If an investor told me that's how they were planning to fund an investment in one of our deals I would be unlikely to accept.