Debt Vs. Equity Investment: A Pros vs Cons
Updated: Oct 16, 2019
Two ways to invest passively, read on to find out which is right for you
The two most common ways to passively invest in a syndication are debt investments or equity investments. Debt investment refers to investing funds with a pre-determined fixed return independent of the performance of an asset. Equity investment refers to investing funds with an anticipated return tied to the performance of an asset. In regards to debt vs equity investing this article compares every investor’s two greatest concerns: risk and return.
As a passive investor your liability is limited to the capital that you have invested. You invest your capital and can relax while the sponsor/ syndicator does the work and you get the returns. In this respect debt investments and equity investments are equal.
Debt investments can be thought of as loans. Money is borrowed and paid off at a fixed interest rate which would represent your maximum return. Debt investors are always paid first. If you are a debt investor and an asset does not perform well you are still owed money. If the borrower fails to make payments debt investors can claim the asset. This independent guarantee is why debt investments are considered lower risk. Equity investments can be thought of as buying stocks. If you are an equity investor and an asset does not perform well, you are not owed money and furthermore may be asked to contribute additional funds if an investment is salvageable. This is referred to as a capital call.
Although debt investments offer fixed returns they are usually lower. The old adage “high risk high reward” runs true here. Returns from equity investments are tied to the performance of the asset so if the asset does better than expected the returns will also be better than expected. There is also a better return with equity investments due to the hold time and equity investor’s ability to receive profits from the sale. Debt investments with long hold times have to have a high enough rate of return to offset inflation or your money will lose its value over time.
The life span of debt investments and equity investments vary. Once debt investors receive their principal and all monies owed they are no longer tied to the asset. Even if equity investors receive all of their principal back they are still tied to the asset unless they are bought out or the asset is sold. The benefit of this is you can get all your money back but still get profits based on your initial investment. This leads to the longer time commitments usually associated with equity investments. To maximize your return you can reinvest the money returned to you into another equity investment and get profit from multiple assets at the same time with the same money you started with!
If you are interested in making a debt or equity investment in stable, performing real estate assets or would just like to learn more about investing please text “Debt Investment” or “Equity Investment” to ARE Holdings Group at (516)-519-3869 or visit our contact page so we can connect you with the appropriate investment opportunity to meet your financial goals.