One of the questions I get really often here at The Investor Insights is “what is the difference between debt financing and equity financing?”
The short answer is debt financing is most like borrowing from a bank where the lender gets a set return each month.
And equity financing is where the lender gets a percentage of the profit with no set return.
Debt vs Equity
I personally prefer to structure all of my real estate deals as debt deals with an equity “kicker.”
That means that I pay a set return each month to my lender or investment partner and, if things are going well, I'll also pay a little bonus based on net profits.
Here's a great infographic from our friends at RealtyShares that explains debt vs equity exceptionally well.
You'll see from these stats that 80% of crowdfunded real estate are structured as equity deals and only 20% as debt.
That's because most institutional and experienced individual investment partners, especially if they believe in you and your deal, will want the potential for uncapped profits even if it means that their investment is “unsecured.”
Most of the individual investment partners that I work with are more interested in a set return each month that is secured by the underlying real estate asset.
They also tend to be low risk investors.
They like the fact that their money is earning 5, 6 or 7% APR every month like clockwork.
But the cool thing about these deals is that YOU can structure them any way you want.
Debt only? Cool.
Equity only? Fine.
Debt with an equity kicker? Yes, please!
Curious about how to attract investment partners and structure deals like this?
Check out my Getting the Money self-study course. It's everything you need to know to work with private money investment partners – even includes documents and scripts!