Funds/syndications for private credit

[Rob Block]

Hey all,

I was planning to purchase a small MF property in San Antonio, but have had trouble finding anything that would have much cash flow, even if I pay over 50% in cash.  Rate caps are around 5-6 for 4-plexes in decent areas.  So I'm considering pivoting to the lending side for the next 1-2 years.  I have around 300-400K to invest and don't want to put it all in one property.  I'm also a newbie and not confident in evaluating projects and borrowers, so would prefer to partner and diversify.

I'm looking at debt funds at crowd funders like Fundrise, as well as business development (BDC) ETFs like Ares, Blue Owl, Golub. Ares (ARCC) in particular seems to have good stability along with high yield.

Does anyone here have experience or recommendations on potential investments?

Thanks, Rob 

[Scott Trench]

@Rob Block

I did a material amount of research into this earlier this year. Here's what I did: 

- I contacted many of the Hard Money Lenders found here on BiggerPockets, and asked them if they had a credit fund and were accepting LP investments. 

- I learned, through the course of these discussions that these funds are wildly different. 

- I created a picture of a fictional "perfect" fund that met all of my criteria. 

- Because nothing really came that close, I ended up just buying notes directly. The funds are also happy to do this, because it recycles capital, allowing them to originate another loan.

Buying notes directly or lending directly has it's own challenges, but I think could be a wiser approach for you for the first year or two. THEN, after that, you might consider investing in a fund that does the same for you. The funds may feel safe, but they are likely not as safe as doing your own work.

My fictional, perfect fund would have characteristics like the following: 

- Double digit simple interest yield.

- Uses no or very, very little fund leverage (LOC for less than 20% of fund equity)

- Lends in one specific location/region that fund managers have deep operational experience in and which has speedy foreclosure laws. 

- Multiple unrelated fund mangers with deep experience (so one can't get hit by a bus)

- Lends at conservative LTVs, stage-gates release of funds based on project milestones.

- All loans are in first position, with senior rights.

- Lends only to experienced borrowers

- Has good liquidity - 1 year lockup or less

The problem is that no fund meets all of these criteria. You have to give up something to get something else. Usually funds that offer higher returns have way higher risks with second position debt, long lockups, are more aggressive on LTV, or use high fund leverage. Funds that meet all my safety criteria offer poor returns.

So, I figured that with $300-$400K, I can just buy a whole note, on a property or two, and do my diligence on that property. These loans DO meet my criteria, so I feel they are safer than many of the funds I looked at.

If I'm in a state, like Texas, with great foreclosure laws, this, for me, is no more risky than buying the property for all cash at the price point equal to the loan balance. My worst-case scenario is I buy an in-progress rehab all cash in a few months. I wouldn't love it if that happened, but I could do it.

I called up these same lenders and asked to go through any notes for sale. Careful - sometimes the notes for sale are the ones that lenders don't want on their balance sheets. So, know that going in and be skeptical. But, if you work with a reputable firm, they will help you through the first note, and you can do the diligence on both the borrower and the property. 

I've done this for most of 2023, in 3-4 different notes and plan to continue in 2024, with a similar amount of capital to you. Now that I am getting more comfortable with the basics of this, I may park my money in a fund, but rest assured that I will give up the return profile and liquidity rights before I give up on the fundamentals of being first position in all notes, my preference for an unlevered, or lightly levered, fund, and requirement for conservative underwriting in concentrated Geographies. 

I trust no fund to do high quality Hard Money Lending that I will invest in nationwide. 

And, while "perfect" doesn't exist, "good" IS there to be found.

Hope this helps and happy hunting!