should you take a personal loan to invest in someone else's deal

[Jason Malabute]

I have heard several people ask if it is good to get a personal or business loan to invest in somebody’s syndication deal. Even if you are investing with a trustworthy syndicator, I will explain why taking a loan to invest in someone else’s deal.

Let’s look at things from a macro level. For the last 12 years, we have seen interest rates drop to historical lows and property values have increased to crazy amounts. Historically speaking, economic cycles normally last around 8-9 years. There’s a saying: “What goes up must come down.” The federal government has been going back and forth with increasing interest rates by .5% this year to combat inflation. Historically, for every point that the feds increase interest rates, property values decrease by 10%.

However, what are you going to do if you hypothetically get a loan to invest in a syndicator’s deal and the economy crashes? How will you pay the loan back if the syndicator tells you that they must hold the property longer than expected until property values recover? That is why it is best practice to only invest in real estate with money that you will not need soon (especially if you are investing in a deal passively). Also, it is crucial to understand that even if you are investing with the “Michael Jordan” of real estate investing, there is always a risk of losing your capital because some things are out of the investor’s hands. For example, even if you invest passively with the best investor, property manager, and asset manager during the 2008 recession, your investment has a good chance of being negatively affected when cap rates decompress. That is why you should not invest your life savings in one deal, and you should not borrow money to invest in somebody else’s deal.

[Jim Pfeifer]

I think it's situational - I do not think the answer is never take a loan to invest in a syndication.  It is true that using leverage increases risk, especially in this market where interest rates could change as could loan terms or the business plan of the syndicator.  Those are all things that should be considered, but there might also be opportunities to use some lazy cash - like the equity in your home or the cash value in your life insurance plans.  I sometimes use cash from those places to fund syndications that are focused on current cash flow such as ATM funds or triple net commercial lease deals.  The expected monthly cash flow from these investments is greater than the interest rate I pay on the loan, so I get the arbitrage and I use the cash flow above the interest payment to pay down the principal.