Real Estate Debt vs Equity Investing



In today’s low-interest rate environment, many investors are seeking opportunities to achieve higher yields than what their traditional investment options may offer. RealtyShares is a real estate crowdfunding that seeks to potentially help fill that void. The following infographic portrays the difference between our three types of investment offerings: debt, preferred equity and JV equity.

When an investor participates in a debt offering, it means that the investor becomes a lender on the property (or properties) through a subsidiary, RS Lending. The borrower of the loan that the investors provide is the property owner. Any payments to the investors are made in fixed installments. Because a debt investment is secured by a lien on the property, in the case of non-payment by the borrower, the investors may initiate legal action to take possession of the collateral to recover their investment.

When an investor participates in a preferred equity offering, it means that generally the investor purchases interests in a specially-formed limited liability company (LLC). Preferred equity is akin to mezzanine debt. The overall return rate is divided into “current” (payable monthly) and “accrued” (payable at maturity) portions. However, when the investment involves only “current” returns (and no accrued portion), a different structure is used that is similar to the debt investments with RS Lending. The underlying security for preferred equity is not a lien on the property; instead, RealtyShares generally has a contractual right to take over the sponsor’s control and economic rights in the event of default. This presents increased risk compared to our debt offerings which have a lien on the property and seniority over preferred equity. Returns are risk adjusted and so preferred equity investors tend to demand a higher return on their invested capital than debt investors.

When an investor participates in an equity offering, it means the investor becomes a shareholder in the ownership of the property. There may also be a third-party lender on the property whose debt interest is senior to the equity. The most senior interest stakeholders get priority in the return of their investment. Equity investing tends to be the riskiest of our three types of offerings because it is unsecured and subordinate to both debt and preferred equity investments. Consequently, equity investors often demand a higher return on their invested capital than debt and preferred equity investors.

Disclaimer: The investment opportunities offered through our platform are private securities and as such can be very risky and difficult, if not virtually impossible to liquidate. The property’s economic performance and value, and thus the value of investors’ investment, is subject to various risks associated with the property. These risks include loss to your principal investment, Non-Transferability of Securities, Nature of JV Equity; No Lien on Underlying Property, Real Estate Market Risk, Fund Risk, Credit Risk, Construction Risks, Servicing Risks, Management Risks, as detailed in the offering material.

The information in this article is not meant to be tax advice, RealtyShares and its employees are not licensed to provide such advice. We urge investors to consult their accountant when preparing taxes. Securities offered through North Capital Private Securities, member FINRA/SIPC.


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