Levered Co-investing through HELOC
Does anyone have experience using a HELOC to lever co-investments? I've seen a couple threads on using/obtaining personal LOCs, but nothing on HELOCs.
Was looking at buying an apartment all cash and getting a HELOC for minor renovations and levering my co-investments. As long as I can cover the interest payments on drawn credit through my salary, is there any issues with using the HELOC to lever co-investments? Are there any income covenants required to get HELOCs that large, or does home equity suffice?
Any insight is appreciated
If you're having to dip into the equity of your house (your freaking house) then you shouldn't be co-investing.
Conversely, any PE fund that’s even halfway decent should be able to cover a 5.5% mortgage rate. To put it in context, my fund sponsored floating rate line of credit is at ~8% right now; kind of wish I would have locked in cheaper leverage at a fixed rate via a HELOC tbh
It would be collateralized by the apartment, but its not a mortgage. The revolving structure also allows for customizable drawdowns - I would only drawdown (and pay interest on) an amount I feel comfortable with each year, and I would co-invest with some equity as well.
Principle payments on HELOCs typically begin 5 - 10 years after the drawdown period begins, and I would already have distributions by that time (and would have gone through multiple bonus cycles). So as long as I can meet the monthly interest payments, are there any significant risks I'm missing?
Hard pass - most of, if not all of those facilities are PIK when it’s negotiated by your firm.
Not negotiated by the firm; a HELOC is from a bank
I know, I meant the leverage coinvest facilities that certain PE firms will get for their employees.
I’ve leveraged a heloc once or twice in my years. Right now expect to get a rate of prime plus 0.50%. It probably would have made more sense to do what you are thinking of doing a couple of years ago but these days it’s more risky as pretty much all helocs are floating rate. Word of caution- after home prices fell in 2008- lots of people’s helocs were cut off due to decreased appraisal values. Mine included. I don’t think this is a good strategy on todays economic climate but I would certainly do it again if the time was right.
This is helpful. Agree that it's is not the right environment for a HELOC just yet - but good to hear the strategy works in a better climate. If you don't mind me asking, what was your LTV before the cut off? I know some banks offer generous terms with 70% - 80% LTVs that could definitely be more risky than a HELOC with a 30% LTV.
Also, how long did you keep your HELOC(s) open before full repayment? Curious how much of the full drawdown period is actually used.
Why don’t you just buy the apartment with a mortgage and then use the extra cash to co-invest without leverage? Money is fungible
Interest on a mortgage is paid on the entire principle, interest on a HELOC is paid only on the amount drawn. If I only draw down the HELOC when the firm makes a new investment, it's significantly cheaper and provides more flexibility than a mortgage. Also origination fees seem substantially cheaper on a HELOC from what I can tell.
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