Many different terms come into play in real estate investments, but there are two very important ones that are sometimes misunderstood: debt partner and equity partner. What kind of partner you are in your deals affects your investment and how you get paid, so now is the perfect time to brush up on these two partner types.
Equity partners have a piece of the pie
As an equity partner, you get a percentage of asset ownership. This means you may have a voice in some decisions, as set out by your agreement with the other parties involved, and get part of the cash flow on a regular basis.
Debt partners have their initial investment
If you’re a debt partner, you’re loaning money and getting the agreed-upon interest rate in return until the debt is repaid. Unlike an equity partner, you don’t have any ownership interest in the real estate, although you may end up with the real estate if the borrower defaults if it’s the collateral for the loan you made.
A debt partner can be essentially “cashed out” once the loan has been fully paid back. An equity partner, on the other hand, isn’t out once he or she receives the principal back; that partner is now an owner and entitled to an ongoing profit share.
Consider the deal-specific pros and cons
Which partner type is for you depends on the deal and the other people involved. In some cases, the other investors may not be willing to close the deal unless you’re just a debt partner. Other times, both options may be available. At that point, you have to decide how much work you want to put in on this particular investment, how long you want to be tied to it, and how well you can work with the other investors.
Being an equity partner has a lot of benefits, but it also means you’ll be more actively involved in the property and everything that goes with that. A debt partner has benefits, too. While you don’t have a say in decisions and won’t share in profits beyond your loan repayments and the return rate for that as a debt partner, you will make money without having to do much besides opening your checkbook. Time is another consideration—equity partners are naturally often tied to an investment property longer than debt partners are.
Consider all the angles when you’re deciding on a debt or equity partnership for your deal or as a part of someone else’s deal. This isn’t a decision to be made lightly; the future of your investment is directly affected by the choice you make.
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