Marketplace lending has revolutionized the matchmaking process between investors and real estate opportunities. To protect your assets, you need to understand how to invest, and the first step is figuring out if you are a debt investor or an equity investor.
How Debt Investing Works
As a debt investor, you are lending money to a property owner to cover their debt. You are not an owner of that property. Debt investing is straight peer-to-peer lending where a property owner needs cash to cover their debt, and you give it to them on the condition they pay back that loan with interest over a finite period. Now, all you have to do is sit back and hope the property doesn’t fail and your payments come in on time. As a debt investor, your loan is secured against the property and you will get your money back even if the property fails. The risk is low, but the returns are secure and solid.
An equity investor is an owner of the property in which they invest. They purchase shares in the property and will therefore share in the profits when the property sells (assuming its value increases). Investing in equity typically signifies a long-term commitment to the property, however, you can sell shares any time. If you sell your shares for more than what you purchased them for, then you’ll earn a profit when you sell.
Equity investment has the potential for huge uncapped returns. However, should the property tank, you are assuming that risk along with other equity investors. The risk is high, but so are the potential returns.
Debt vs. Equity: Which Type of Investment is Right For You?
Deciding between equity and debt investing comes down to your philosophy on life. Which do you believe to be true? Slow and steady wins the race (debt investment) or “greater the risk, greater the reward” (equity investment). Are you cautious with your assets? Or are you a gambler, willing to risk more to gain more?
Diversifying Your Investment Portfolio
The truth is, you don’t have to choose. The more you diversify your portfolio and your investments, the more you are securing long-term gains. The high potential returns on equity investments are great, but lower-risk debt investment, with secured returns, can help take some of the pressure off of those high-risk equity investments. Equity investments fluctuate with the market whereas debt investments stay more even-keeled. It’s easier to take a gamble on equity when you have a solid debt investment foundation.
Be smart when you are building your real estate portfolio. Plan wisely, know your investment types, and diversify.