Raising debt or equity - which is better?Jan 31, 2022
There are a variety of funding resources out there for property investors & developers, but ultimately, these are broken down into 2 categories – debt and equity.
Not sure whether you should raise debt or equity for your projects?
Let's figure it out!
Let’s talk about debt first.
The most common forms of debt you will come across in property are mortgages, bridging and loans.
This means that someone is lending you money in exchange for the promise of being paid that money back, along with interest.
When you ask an investor for a loan, you are asking them to make a debt investment.
Debt investments are usually secured by the properties you wish to purchase, which provides a kind of insurance policy for the repayment of the loan (otherwise known as security).
If the project doesn’t do well, debt investors can seize the project to recoup their money.
They generally have a senior claim to the proceeds of the project.
They are right at the bottom of the capital stack.
It does not matter how much profit a project makes, debt investors are still entitled to their money and interest, if there is enough.
So, you are bearing the brunt of the risk when asking for a debt investment.
Now, let’s move on to equity.
The most common form of equity you will come across in property is a joint venture.
This means that you are offering investors a stake in the project and any profits will be split proportionally.
The pros of offering an equity investment means that whilst the profits will be split with the investor, so will the losses.
Risks and rewards are shared, which reduces the burden on your shoulder.
There is no right or wrong option...
Both debt and equity investments have their pros and cons, so it largely depends on what is best for you and the project.
Choose the option that makes it a win-win situation for both of you.
There will be some situations where it might make more sense to offer one over the other.
Remember that above all else, this is your project and you need it to be profitable.