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  • #16
    Originally posted by dennis View Post

    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.
    It's apples to oranges though. Direct RE is work. Even the most stable NNN commercial property has work involved.

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    • #17
      This could be reasonable. Don't forget that interest rate on the mortgage refinance is tax deductible as an investing interest expense (interest tracing rules). I think it's fairly likely to get the 6% preferred return minus 1.25% or so real effective interest rate =4.5% plus the appreciation for a net of 7.5%+. I think you would come out ahead and the fund sounds like it has a good strategy. Less liquid than DLP (5 year lockup with penalty for early withdrawal) and performance has been well under DLP for the past year and a half but I bet would be some equalization long term. I am thinking of Origin but much more heavy with DLP and some individual syndication deals (4-6 deals over time is the same as a fund and you can cash flow into it over a year or so similar to a fund that might have your original amount un-invested for a while and take up to a year to get invested.

      Also consider a "less volatile" but very liquid alternative like NTSX for a portion if you want to try and use the leverage.

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      • #18
        Originally posted by VagabondMD View Post
        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.
        Agree. Hard no here. I would never do this. Late 40s, hmmmmm if it all goes to zero, what would your reaction be? I would rather put it all in VTSAX, that at least is diversified and unlikely to lose money over 30 years. I don’t borrow to invest, but if i did, i would not borrow to invest in a RE fund.
        Another option: buy a rental. Although not diversified, at least you have an asset and more control.
        Hard no.

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        • #19
          I really dont understand the concept of this.

          If my calculations are correct it takes $400,000 of income to make $250,000 after taxes and pay off your mortgage. So now you take that out of the value of your house you have to pay interest on the money and make at least another $400,000 to pay it off. It seems like that move alone would cost you $150,000. So even if your realestate fund does extremely well. At 8% it is now where close to making up the difference you lose on taxes.

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          • #20
            Allow me to reframe the question. What if the OP had a $1M home with a $250k balance on the mortgage and had $250k sitting in a taxable investment account, in cash, and decided to deploy the $250k into the RE investment fund?

            The math is the same, but psychologically it feels a lot different.

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            • #21
              Originally posted by VagabondMD View Post
              Allow me to reframe the question. What if the OP had a $1M home with a $250k balance on the mortgage and had $250k sitting in a taxable investment account, in cash, and decided to deploy the $250k into the RE investment fund?

              The math is the same, but psychologically it feels a lot different.
              The math is same; absolutely - the question is the WHY - as the strategy underlying has changed and they why behind it is important. I believe the driving force may be combination of extremely low interest rates and FOMO of a white hot real estate market.

              With any paid off RE, there's always the itch to getting back in the leverage market. We had that a few times since moving over to a cashflow RE stance. That said, we still hold a mortgage on our primary house and actually increased it to 700k (from 530k) with the recent move for the exact same reason of cheap leveraged moneys. --- the difference is our underlying pinnings and reason hasn't changed. From my readings, OP's has changed. (for the better IMHO, just need to be aware of the reasoning and SO is on board too with it).

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              • #22
                Originally posted by Hoopoe View Post
                I think it's fairly likely to get the 6% preferred return minus 1.25% or so real effective interest rate =4.5% plus the appreciation for a net of 7.5%+.
                I may be missing something in your calculations, but I thought you should either do it all pre-tax or all effective rate. You'll be paying tax on the 6% and the appreciation too. So if you're at a 50% tax rate as implied here, you'd be making 3% effective preferred, minus 1.25% plus ~2% (20% LTCG + 10% state) on the appreciation. Minus all the origination fees.

                It's not crazy to do it, and 3.75% isn't terrible, but there is some risk. Appreciation can always be negative if prices fall from their current high levels.

                That said, locking in low fixed rate debt for 15-30 years often feels pretty attractive.

                All a matter of personal risk appetite.

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                • #23
                  Originally posted by DAK View Post

                  I may be missing something in your calculations, but I thought you should either do it all pre-tax or all effective rate. You'll be paying tax on the 6% and the appreciation too. So if you're at a 50% tax rate as implied here, you'd be making 3% effective preferred, minus 1.25% plus ~2% (20% LTCG + 10% state) on the appreciation. Minus all the origination fees.

                  It's not crazy to do it, and 3.75% isn't terrible, but there is some risk. Appreciation can always be negative if prices fall from their current high levels.

                  That said, locking in low fixed rate debt for 15-30 years often feels pretty attractive.

                  All a matter of personal risk appetite.
                  The 6% preferred return is tax free as it is shielded by pass through depreciation.

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                  • #24
                    Hard money loans are high risk. You are basically loaning money to someone who cannot get cheap money from a bank. So very high risk for loss. I would never do a hard money loan for less than 10% return, to compensate for the high risk. Actually, I have never done and will likely never do any hard money lending at all.

                    I do invest in real estate, but given the state of the market, it takes a lot of hard work to find properties with strong returns. Caution is advised as you can easily have a loss of principal in this type of investment.

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                    • #25
                      Seems that you are confusing risk management with investment selection.
                      * Consider risk of an investment first
                      * Then consider the return
                      Diversification is a risk management technique only. More diversification does not equate to less risk. In your scenario, you are choosing a higher risk investment (more concentrated, liquidity, and private investment etc.) AND now you want to leverage the investment. Does that equate to less risk? What is the risk premium hurdle?
                      Seems like you are chasing yields while at the same time trying to lower risk.

                      https://www.fiphysician.com/good-annuities/
                      You can "buy" lower risk, but it will cost you (SPIA & DIA). It does not make sense to leverage risk reduction (defeats the purpose).
                      https://www.immediateannuities.com/immediate-annuities/


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                      • #26
                        There is risk in these RE investments. I've invested in several privately held REITs over the years. Some have done well and produced the expected returns. A few have provided dividends, but lost share value for a variety of reasons. One had a disastrous fall in value when the board was found guilty of accounting fraud, etc... as they tried to take the private REIT public (google ARCP).

                        Just keep in mind that these investments do carry risk and are generally illiquid. In the end, when you want to cash out, you will be told what your shares are worth.

                        Tread lightly and consider the risk when you are mortgaging your house for these funds. Having no mortgage for the past 15 years has been the best boost for my regimented investing strategy.

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                        • #27
                          Originally posted by dennis View Post

                          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.
                          In that case, use the words "cash flow" instead of "return." There's a big difference, as cash flow is only a portion of the total return, and often the portion that is subject to tax. Although, in this case, the cash flow is pretty much tax-neutral.

                          Berkshire Hathaway has given its shareholders 0 net cash flow and made billionaires out of many of them.

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                          • #28
                            Originally posted by PhysicianOnFIRE View Post

                            In that case, use the words "cash flow" instead of "return." There's a big difference, as cash flow is only a portion of the total return, and often the portion that is subject to tax. Although, in this case, the cash flow is pretty much tax-neutral.

                            Berkshire Hathaway has given its shareholders 0 net cash flow and made billionaires out of many of them.
                            Investing in real estate is completely different than a publicly traded stock. Of course you know that. Any cash cow is a plus, regardless of whether it is retained or distributed. You know that too. Would you invest in real estate with zero cash flow? Btw, any idea how many billionaires were actually created by BRK? To be useful, the gain would have to be 1B.

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                            • #29
                              Applaud realizing a paid off house is no panacea.

                              However, these real estate funds are just ok, and come with a very high level of risk of underperfromance and outright fraud.

                              Put this money in taxable as 60/40, all stocks, even a little levered and that would make more sense. Buy a combo of REIT, mortgage debt etn, etc...to make a public/safer version of this.

                              As everyone else who has invested into this level of risk has said, these returns are absolutely terrible for the type of investment and risk you're taking on. Just because its called RE and you feel comfy with that doesnt make it any less true.

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                              • #30
                                Originally posted by Tim View Post

                                Investing in real estate is completely different than a publicly traded stock. Of course you know that. Any cash cow is a plus, regardless of whether it is retained or distributed. You know that too. Would you invest in real estate with zero cash flow? Btw, any idea how many billionaires were actually created by BRK? To be useful, the gain would have to be 1B.
                                Just pointing out the difference between cash yield and total return in response to the inaccurate "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%."

                                "return" was wrongly substituted for "cash yield," making the investment sound lousy, when in fact, the net return on the OP's strategy is expected to be in the 6.5% to 8.5% range after accounting for the margin interest, more than double the quoted 3.5%.

                                And apparently, Warren created at least 7 Berkshire billionaires with 0 cash flow going to those now-billionaire shareholders. The point being that it's misguided to focus on cash flow while disregarding the metric that actually matters when investing, which is total return.

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