5 Reasons Why You Should Consider Equity Financing For Your Next Project
With the proliferation of lending sources, most notably the growth of real estate crowdfunding, Sponsors now have a variety of ways to financing their commercial properties. The debate still persists however between debt or equity financing and what investment offering is right for your project.
Equity financing offers a number of potential advantages, such as more flexibility, more liquidity and potentially an enhanced return on your investment. Moreover, the current historically low interest rates are providing positive leverage for investors, making equity investments in commercial real estate an option to consider. Increased investors searching for real estate equity investments means a readily available source of funding for your investment.
If you’re considering equity financing, here are some key advantages
1. No Monthly Payment Obligation
With equity financing, you provide the investors ownership in exchange for funding. Because you essentially become partners, there is no loan to repay and no monthly payments to make, freeing up cash that you can use for improvements or to further grow your investment. The investors receive a profit when the real estate produces a return, which may be especially important if the investment does not produce cash flow initially.
2. Improves Credit Rating
The amount of debt you owe accounts for 30 percent of your credit score, so if you’ve used a large percentage of your available credit or have a large balance remaining on an installment loan, lenders consider you a high risk. Equity financing can preserve both your personal and business credit by eliminating the necessity to personally guarantee a loan. As part of a business entity, you maintain a low debt-to-equity ratio and keep your business credit in good standing. This will make it easier to acquire debt financing should you decide to at a later date.
3. Funding Based on Profit Potential
Those who invest for equity are interested in the profitability, looking for a higher rate of return than debt financing, understanding the increased risk. Presenting a sound investment strategy to an investor whose interests are similar to your own will significantly increase the probability of securing funding. And if you have a less-than-ideal credit rating, equity financing may be preferable to debt financing.
4. Valuable Contacts
Generally, it’s more experienced investors getting involved in equity offerings. People who can provide valuable insight and assist with decision making, which can sometimes be beneficial if you’re an inexperienced investor. Your equity partners may also have contacts in the commercial real estate industry who could further contribute to the success and growth of your venture. Recommendations for reliable contractors, inspectors and other service professionals can save time and add up to cost savings. Having a team of knowledgeable investors to consult with regarding growth strategies can be invaluable. They can assist with navigating the terrain of contracts and in some cases help you avoid legal pitfalls.
5. Additional Funding Sources
Once your commercial real estate investment shows good growth potential, you may decide to increase your holdings. If it has displayed good performance, your equity financing partners may be prepared to provide additional funding for the investment. This eliminates the need to search for additional funding and repeat the application process. A readi
ly available source of funding can significantly increase your profit potential, whereas it provides the resources needed to take advantage of opportunities as they arise.
Understanding the Risks
Like any investment, equity investing can be a risky endeavor. Poor project management, depreciation and changes in the local real estate market could lead to lower than expected yields and disgruntled investors. With commercial properties in particular, shifting conditions could hamper your ability to find tenants at terms that were desired when the project was conceived. As the borrower, even knowing there is no guarantee of future return, it’s your duty to strive to meet expectations set.
All these factors are important differentiators when choosing between debt financing and equity financing for your project. The infographic outlines some other key points between debt and equity offerings so you can compare and contrast.
At RealtyShares, we offer both for our Sponsors and investors. Equity investing tends to be riskier than debt investing because the equity investment is unsecured; consequently, equity investors often demand a higher return on their invested capital. Determining what if best for your project requires a close look at your goals and what you can offer your investors.