Investing in syndications with heloc ,bad idea?

Question

Hello,

I am just toying with this idea of investing into syndications using HELOC from my current rental as there is substantial equity  which can be tapped into is that too risky? Appreciate your inputs

Thanks

Allan Smith · Answer

HELOCs should be used for projects with 12 month or less timelines. So zero syndications.

however I think your risk profile is decent if you invest in a 6 month flip with someone passively, that kind of thing.

remember, these lines of credits get amortized if you're not able to pay it back, so what you need to do to calculate your risk is make sure you have the cash flow or income to float payments if all goes to heck.

Charles Carillo · Answer

@Peter Morgan

When you add leverage to an investment; it greatly increases the risk. In addition to vetting the deal, sponsor, etc., do you have enough liquid funds to cover your HELOC if you lose 100% of your investment?

Mike Dymski · Answer

The interest rate on a HELOC for investment property is likely near 10% (prime +1-2%) and it's variable.

Carlos Ptriawan · Answer

Syndication is at higher risk environment as of today.And you put your primary well-being as collateral for such high risk low return investment. But it's not the worse idea though, the worst I read in BP is to sell their home and invest in ETH. Gosssh :-) LOL

Carlos Ptriawan · Answer

If you use residential variable-rate HELOC to invest to CRE syndication in 2023, most likely you will lose money.Just think about it. You make $98 from $101 with higher risk proposition. You'd better use the HELOC money to sell put in option market lol

Chris Levarek · Answer

@Peter Morgan How you judge risk is a personal decision. What one person considers risky, is not so risky to another. That being said, using a HELOC for a syndication in today's market is just not worth it.

In 2018,2019,2020 even, it might have been a risk judgement call. Rates were at 3-6% on Helocs.

Today however, you will invest into a syndication which in the first years will push 0-5% cashflow typically on value-add.

The 2nd, you will typically get 3-8% cashflow and the third year, you will start to get 8%+ with any catchups on preferred returns.

If you are paying 10%+, which most HELOCs are today, you will be out of pocket for first two years.

If you are willing to do that, and justify the risk, then yes eventually you will be made whole at sale of syndication.

Might even come out 5-10% in profit.

BUT, 2-3 years is a long time to be paying out to a HELOC with not profit.

Chris Seveney · Answer

@Peter Morgan

As noted, adding leverage adds risk but the bigger question right now is what would you invest in? If you invest in a syndication you are investing in one deal.

I am in a group where the string of messages from syndicators who have stopped issuing distributions, had cash calls and extended exits is off the charts. If your LOC was 5 years and you get caught in the syndication that does not exit then what happens?

You will want to invest in something that probably is more liquid than a syndication if using LOC funds. Also understand the returns as if the pref and distributions are lower than your interest and the bifurcated return is heavy toward the exit - you do not know if you will get that pop at the exit.

I would go with something lower risk and possibly a lower IRR but still arbitrage the rate to make a few percentage points.

Of course always better to use cash or ira funds

Charles Carillo · Answer

It is safest to use your liquid cash but, it is not one or the other. You can invest via a HELOC and liquid cash (50/50 or 60/40 etc.). Just that you are investing funds you can cover if you lose 100% of your investment. Lastly, don't expect much cash flow for the first year; maybe have this debt servicing set aside.

Peter Mckernan · Answer

This would increase your risk and also put you into a position that can be even more challenging in these times. If you put in that money from the HELOC then after awhile they do a capital call, you could be sitting on the sidelines thinking you were going to get your funds back quickly then there is something that comes up and the project needs more money as well.

The next problem is that you need to be more liquid than you think, there is an investor I am good friends with pushed all his morning into syndications (no HELOC money), and he has no other capital with no refis on those deals coming at all this year.

For a syndication or let's say mutual fund, expect to put money in and not get it back for 3-5 years. You will be stoked to get the project reposition, but there has not been many "good" syndications going on right now that are running numbers on deals to do them.

Reed Rickenbach · Answer

What is the projected CoC return of the syndication? If the bulk of the return is in IRR you're going to be paying that HELOC on your own for the next 5 years. Is your HELOC variable?

You either invest with cash, get a CoC return of 5% (I assume) and IRR of 12-14% (I assume)

OR

You invest with HELOC, taking variable rate risk and get a 0% or negative CoC return & a 7-9% IRR if your operator gets the sale price they're aiming for.

As a one-off I don't think it is a huge deal but I wouldn't get in the habit of collateralizing real assets for these especially at variable rates..

Investing in syndications with heloc ,bad idea?

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