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  • borrow to invest in RE fund

    I am in my late 40s, and at the beginning of the year, we paid off our mortgage to be debt free for the 1st time in forever (yay!!).
    I thought that I would never borrow again...
    Tomorrow, we are taking out a mortgage against our home for $250K (15 yr fixed at 2.5%), and that money will go directly to Origin Investment's Income Plus Fund. I rationalize this because 1) the rates are so low, and 2) in order to invest in private RE funds, you need to have a chunk of cash at one time, and I am hesitant to sell off any of our publicly traded investments to do this...and it would otherwise take many months to accumulate this amount of cash prospectively. I will probably pay off the new mortgage in 5 years, all the while keeping our investing plan and goals intact.

    So, my question is: Going back into debt = Crazy? or crazy smart?

  • #2
    It's just a form of leverage. It's up to each individual person if they want leverage/debt in their life in order to invest more.

    As for this particular RE fund, I wasn't familiar with it so I had to google it. I wouldn't invest in it solely because this picture has water falling from who knows what randomly.

    https://origininvestments.com/2019/0...comeplus-fund/

    Anyways, seems like there are a lot of fees and it sounds pretty illiquid. They do appear to have a decent track record though.

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    • #3
      Hmm, I would not do that. This sounds a lot like a market top (for RE funds) when people are doing these sorts of things, so desperate not to miss out. I am one voice and tend to be on the boring and conservative end of the spectrum. Others here might applaud you for doing so.

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      • #4
        Really depends on where you are in retirement funding and risk taking. At 2.5% it's a little high for current 15y but it's probably because a smaller loan that's causing that. Just balance out the cost of the loan fees into the issue and your risk tolerance and reasons for pulling money out of primary house that you worked hard to payoff.

        What changed in your retirement plans to make such a shift?

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        • #5
          No.

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          • #6
            Being debt free was clearly not as magical for you as for others.

            Risk/reward. Not sure what 250 means to you up or down.

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            • #7
              Originally posted by StarTrekDoc View Post
              Really depends on where you are in retirement funding and risk taking. At 2.5% it's a little high for current 15y but it's probably because a smaller loan that's causing that. Just balance out the cost of the loan fees into the issue and your risk tolerance and reasons for pulling money out of primary house that you worked hard to payoff.

              What changed in your retirement plans to make such a shift?
              Good question - about a year ago, we decided to alter our investment plan, to include private equity RE funds - with a goal of 20%, no more than 25% of our portfolio. This is primarily to offer more diversification in our portfolio beyond the publicly traded equity and bond funds. So, I reasoned that in order to invest in these real estate funds, it necessitates a sum of cash to invest at once, which seems easier this way versus waiting for money to accumulate and then invest. Honestly, 5 or 6 months ago, I would have never thought about taking a loan to do something like this, but the more I thought about it, the more it seemed to make sense to me.

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              • #8
                No thanks.

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                • #9
                  So basically you're doing an arbitrage play, paying 2.5% for the funds to get a 6% return (from their website). Net is 3.5%. I don't think the risk is worth the expected return. Directly owned real estate gives you a much higher return.

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                  • #10
                    The most questionable part of your plan to me is putting all your eggs (or 20% of your retirement portfolio) in one sponsor’s basket. Let’s all hope you don’t get Madoff’d.
                    “Work” is a four letter word for good reason.

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                    • #11
                      Originally posted by Lithium View Post
                      The most questionable part of your plan to me is putting all your eggs (or 20% of your retirement portfolio) in one sponsor’s basket. Let’s all hope you don’t get Madoff’d.
                      I see what you mean. Allow me to clarify - although my goal is to have 20% of my overall portfolio in private equity RE funds, I do not plan on investing with just one sponsor. I am already invested with 37th parallel and DLP, so Origin would be my 3rd...

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                      • #12
                        Originally posted by dennis View Post
                        So basically you're doing an arbitrage play, paying 2.5% for the funds to get a 6% return (from their website). Net is 3.5%. I don't think the risk is worth the expected return. Directly owned real estate gives you a much higher return.
                        You are correct - the 6% is just looking at their distributions (0.5% per month). However, there is also an anticipated appreciation of the properties of 3-5% per year. Whether that actually happens remains to be seen, but even if it is say, only 1 or 2%, that is an overall 7-8% (ie, 4.5-5.5% net return). And they have a good track record...

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                        • #13
                          Originally posted by dennis View Post
                          So basically you're doing an arbitrage play, paying 2.5% for the funds to get a 6% return (from their website). Net is 3.5%. I don't think the risk is worth the expected return. Directly owned real estate gives you a much higher return.
                          You're confusing distribution yield with total return. Target is 9% to 11% annually (I'm invested in the fund).

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                          • #14
                            Originally posted by deanyar View Post
                            I am in my late 40s, and at the beginning of the year, we paid off our mortgage to be debt free for the 1st time in forever (yay!!).
                            I thought that I would never borrow again...
                            Tomorrow, we are taking out a mortgage against our home for $250K (15 yr fixed at 2.5%), and that money will go directly to Origin Investment's Income Plus Fund. I rationalize this because 1) the rates are so low, and 2) in order to invest in private RE funds, you need to have a chunk of cash at one time, and I am hesitant to sell off any of our publicly traded investments to do this...and it would otherwise take many months to accumulate this amount of cash prospectively. I will probably pay off the new mortgage in 5 years, all the while keeping our investing plan and goals intact.

                            So, my question is: Going back into debt = Crazy? or crazy smart?
                            I am mixed on the plan. Generally, it is good to use debt from one investment to an other, but not so good to take on personal debt for investments. I am doing exactly what you suggested, but I am doing a cash-out refinance from an investment property. In my case all the costs and interest will be written off against income from the first property. You don't get any of these advantages. Also, your net difference is not as good as it looks at first glance. Your net will look like this (Income from the investment - tax on the income - interest on your home). If you pull the money on an investment property, the tax is after the interest is paid. All that said, what you are doing is no different than if you had not paid off your home loan and instead put the money into an investment originally. As long as the investment makes a return high enough to cover the interest and taxes on the gain, it is a win and hopefully you are getting some pass-through deprecation as well.


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                            • #15
                              Originally posted by PhysicianOnFIRE View Post

                              You're confusing distribution yield with total return. Target is 9% to 11% annually (I'm invested in the fund).
                              I invest in real estate for passive cash flow and that's what I was writing about. 3.5% net cash flow isn't nearly as good as directly owned real estate.

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