Leverage into a Syndication Deal?

Question

Good morning everyone!

So, I am about to break into the world of syndication deals!   (Joinging, not creating!).

I am happy with the passive nature of these syndication deals, and happy with the returns they provide cash on cash.  But it got me thinking about if there is a way to leverage the cash injection.

For a rental property, investors are able to leverage their cash with a bank/lender to then take a loan for the remainder.  I.e 20% down, 30% or what have you.

So, does anyone know of a way (or a lender who does this) to take the money I was going to invest.  Let's say it's $50k, use that as the "down payment" on a loan to use the full amount to invest in the syndication deal.  I.e. My $50k as a 20% down for a loan of $200k, giving us a total investment amount of $250,000 vs $50,000.

I've built a spread sheet and can tweak terms....but most variations I work on come out cash flow positive (more so than pure cash only), and on the refinance and sale proceeds is where the leverage really kicks in.

The loan would have to have collateral......so one could use 1) Their business, 2) Current holdings, 3) Home (hope not), or.......4) Since as a syndicate investor we will be an actual owner of the property (hence the ability to depreciate our share) is it possible to use our future stake in the property as collateral itself?

Any ideas on interesting/inventive ways to leverage into a syndicate deal?

Thanks everyone!

Dave

Bill F. · Answer

@David Hite

As a stand alone product, what you are looking for doesn't exists to the best of my knowledge. You could use other products out there, like a personal loan, a HELOC as @Paul Moore suggested, a margin loan from your brokerage accounts, a 401k loan, the list goes on. Basically any loan that gives you unencumbered funds you could do what you described.

The question is: should you. As @Mike Dymski mentioned, most syndications don't cash flow all that much for the first few years and are highly dependent on refis/exits to produce the bulk of their returns. That means you'd have to float the monthly payment yourself from other funds. Not to mention the risk of default is no longer simply your equity, but now is debt that you have to pay back.

Ashish Thapliyal · Answer

Hope it turns out to be in your favor, however I much appreciate that way way forward thinking and an enterprisingly different dimension of creative finance !! Amen !!

David Hite · Answer

I could HELOC on my personal home or my commercial real estate....

I was hoping that in the same way a rental property can get leveraged funding using the purchased property as collateral would work.....but unfortunately not likely.

Thanks for all the ideas etc!

Todd Dexheimer · Answer

A HELOC or personal line of credit is possible.

Kelly Iannone · Answer

@David Hite

You’ve gotten some good answers but would like to add on re: using ownership interest as collateral for a loan. The PPM usually prohibits this as it could but the entire investment at risk and other investors returns should you default. So you’re looking for leverage somewhere other then said syndication.

Tony Kim · Answer

I'd be very surprised if any lender would be willing to use your syndicated investment as collateral prior to you even investing. If anything, I could maybe picture an independent bank willing to collateralize a stabilized syndicated investment that already had a long history of consistent payment. But that would obviously not work with a syndication that you were looking to invest in the near future.

Also, keep in mind that syndicated deals are also leveraged, so if you are set on going this path, a syndication that uses 75% financing would be like financing 94% of your purchase, using your 25% down scenario described above (not 20%).

Mike Dymski · Answer

You have a future on Wall Street...

Joking aside, many syndications investments return mid single digit cash on cash returns in the early years...and your cost of debt will be 3-4% minimum; so, you won't make much of a CoC return during the early years and most of your return would come at the sale of the property.

The answer to your question lies somewhere in between keeping no leverage on your personal balance sheet and max leverage.

Paul Moore · Answer

Hi @David Hite. I’m surprised your post didn’t get replies yet. Many investors refinance lazy equity in their homes or other real estate investments to raise capital to invest more in syndication deals. Lacy equity is only affectively earning you whatever your interest rate is on the loan. Typically 3 to 4%. So borrowing against stay home or investment and investing at a higher rate makes sense for a lot of people.

It would be rare to get a lender who would loan you money to do this, but it would definitely be a relationship loan. Meaning that you would have to go to a local banker who knows you well and would consider doing this for you. I would never use hard money to do this of course.

And if you take this path, I would be extra certain of the syndication you invest in. Do a lot of research and be sure you are getting a conservative investment with a little chance of losing money in any economy.  I would get @Brian Burke’s excellent book The Hands-Off Investor to teach you how to vet the best syndicators and deals.  Happy Investing!

Leverage into a Syndication Deal?

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