Investing in LLC when rates are rising.

[Roy Mitle]

Hi

Is there anyone on this forum who invests in real estate LLC firms. These firms pool in money from investors, buy big appartment complexes, renovate them and re-fi to return money and then sell them for a profit. I have done investments previously in them as a means of diversification.

I was planning to invest in such an LLC which seemed quite good but the rising interest rates is giving me pause. Till now have only invested when rates were going down ie the past years. The sponsors say that is not an issue and they do have a great track record. So asking others who may have gone through this before whether rates would change IRR and cash-on-cash.

Thanks

[Evan Polaski]

@Roy Mitle, will rates change IRR and CoC? Yes. If floating rate loans, and rates rise, cash flow will be impacted. Also if rates rise, typically cap rates will follow, meaning selling at a higher cap rate than going in, also effecting IRR.

There are mitigations to this.  Fixed rate debt will mean no impact to cash flow.  Also, if in an assumable fixed rate loan with plenty of term left, the owner can sell at a premium due to the favorable financing tied to the asset.  

I would ask the sponsor to see sensitivity analyses based on moving interest rates and sale cap rates.  This should give you a gauge on a) if they are prepared for the unexpected, and b) let you determine if the risk is still worth it to you.  A good deal will still have okay, but not great, returns even if rates rise several points.