Investing with a syndicator using low-interest Line of Credit

[Dean Attali]

I currently invest with a syndicator using my own money, and I'm getting 8% per year back through it, with the hope of getting much more in a few years down the line with the property is sold.

I also have access to a 4% line of credit through my bank. My question is - is it a bad idea to do another similar investment, with an 8% return, if I can get a 4% loan? It essentially means I can get a 4% return on whatever the line of credit is, without costing me anything. I understand the risk of if the deal goes south, then I will have to pay back the LOC plus 4% interest, so in the worst case scenario I lose 4%. But are there any good to not do this?

[Matthew Baltzell]

@Dean Attali I hear where you're coming from in theory, but I think there are a lot of factors to consider.

1. Why do you have a line of credit? Is it for a rainy day or  did you get one to invest?

2. What is the equity multiple of the syndication?

3. How often are distributions through the syndication, monthly or quarterly?

• You should take this into account. Say it's quarterly, as soon as you use that money, you'll begin accruing interest on it. When would you make payments to the credit line? Quarterly?

4. You MUST remember your money will be tied up for the entire holding period. If something were to go wrong, you could really put yourself in a bind?

5. Biggest thing to consider is what type of return are you looking for? 

With all that said, I think only you can make this decision. 

Best of luck:)

[Dean Attali]

Thank you Matthew. Funny that you responded because I'm actually currently invested with you and this question is on behalf of a friend who wants to also invest with you!

[Alina Trigub]

@Dean Attali

A lot depends on your risk tolerance. Can you tolerate losing money in such investment? Can you afford to pay it back out of your own pocket. What if recession hits sooner than anticipated, do you have the funds to cover for it if the investment stops paying dividends.  In other words, think of a worst case scenario and what you will be able to do to continue living your current life style if such thing happens. 

What are your investing alternatives? Is it worth putting this money into the stock market? Perhaps this article can help: https://www.biggerpockets.com/member-blogs/10850/84063-private-equity-meets-stock-market

If you have more questions, feel free to PM.

[Ivan Barratt]

@Dean Attali this strategy has "brought down the house" throughout history.

The saying goes, "Don't borrow short and invest long." 

Read: Long Term Capital Management and The 2008 housing crisis as two great examples when values dropped and short term raised increased.

[Greg Scully]

@Dean Attali - I see the Heloc as a toll for short term strategies...flipping, hard money loans etc.  The arbitrage opportunity still exists with the syndication, but the long term aspect is more suited for money that is available for investment.

[Eric Schultz]

Dean Attali

I was able to pull a sizable HELOC from my primary residence last year and may use a portion of the funds to invest in a syndication deal on 200+ unit apartments.

I’m considering this approach over using life insurance cash or other means because of a few reasons:

1.) The return on equity sitting in a property is zero. These are lazy dollars. A dollar is not a dollar is not a dollar.

2.) It is a risk to leave much for than 25% equity in a positive cash flowing property because the equity could disappear in a market correction and never have been effectively used to the owner’s benefit.

3.) The syndication opportunity with this particular operator I’ve met with is unique. They use an “infinite returns” model. Your original invested capital is returned to you in 25% increments over a 4 - 5 year span, while you continue to cashflow and remain in the deal until the property is sold in year 5, 6, 7 or 8. They have exceeded 30% IRRs with this model in several deals and have successfully done 55+ deals to-date.

So, if you are going to borrow short to invest longer term you may want to consider a syndication deal that uses supplemental financing with strong value add to refinance and return investor capital over the shorter term as described in #3. This will allow you to pay the LOC back and increase your % ROI arbitrage as the years progress.

Since there is always risk in losing money in an investment, you may want to have a plan for paying of the LOC with other means.

[Charles Kao]

@Matthew Baltzellde @Dean Attali Matthew's response sums it up well but also line of credits

tend to get shutdown or called due or have variable rates so in a down economy could you handle this in addition to investment not performing? I personally only invest money I am 100 percent comfortable I can lose all of it in other people's deals and thats what I tell my investors. I don't want money they need for a wedding or to send their kid to college.

[Taylor L.]

As a syndicator I would not take that money. 

@Ivan Barratt love that quote.

[Kay Kay Singh]

@Dean Attali It is not smart unless you have several other streams of income because that should be your rainy day money not a long term investment.I do use it some time but pay it back asap.I can take the benefit of interest write off though if invested in real estate.