Alternative property investment platforms have a number of advantages over REITs and direct property ownership and one of those is the ability to choose between debt and equity investments. But before you invest, we thought we’d help you understand a little more about what each of them means.
In debt investments, the investor is acting as a lender to the property owner or developer. The loan is secured against the property itself and investors received a fixed rate of return that is determined by the interest rate on the loan and how much they have invested. In a debt deal, the investor has priority when it comes to claiming a payout from the property.
Shorter lead times
Traditionally debt investments are related to development projects which means they typically have shorter holding periods compared to equity. However, this is dependent on the nature of the deal.
Debt investments by their nature are also considered lower risk. As the loan is secured against a property, this acts as an insurance policy against repayment of the loan. In the event that the property owner or developer defaults, investors have the ability to recoup the loss of their investment via foreclosure action.
As debt investments carry less inherent risk, their returns are generally at lower rates than equity investments. Investors should decide whether they are willing to sacrifice potential higher returns for a lower risk option – this will be dependent on your personal circumstances.
In the case of equity investments, the investor becomes a shareholder in a property and their stake is proportionate to the amount they have invested. In many cases, property crowdfunding website only enables equity investments on commercial rental properties, allowing investors to earn returns based on the rental income that the property generates. Here at Propio, we also allow equity investments on development. This means that investor returns are based on the appreciation value of the property when its sold – this is either as a result of the construction work done and value-added on the site or due to improving market conditions.
Equity investments generally allow more scope when it comes to earning potential than debt alternatives however, this is due to the fact that they carry more risk (markets can fall, construction costs can over-run and so on.) Unlike debt, investors do not have a charge on the property but are usually shareholders in the underlying company – this means they are second in line when it comes to receiving a payback on their investment after any debt.
Equity investments generally happen over a much longer time frame than debt, especially those related to rental income, which isn’t great if you require liquidity in your investments. That being said, the equity development investments available on Propio offer similar lead times to debt opportunities, and with a much higher return potential.
Which one is right for me?
Investors should be aware that both debt and equity investments carry risk. We would advise anyone thinking about investing in either kind of opportunity to read all the information provided before making a decision on where to invest their money.