Hey welcome to another edition of 60 second insights
This week’s question is what is the difference between equity partners and debt partners.
Debt partners are like lenders, they are going to loan you money and you are going to have an obligation to pay them back. They are not going to participate in the equity in the deal.
That’s a good thing because all you do is give them a return at 5, 6 or 7% or sometimes a little bit higher and when the deal is done, it’s done. The benefit of using a debt partner is the fact that you can actually re-finance them out of the deal.
Equity partners, will give you money and you have no obligation to pay them back. But if you’re smart and you are good investor, you will be owners of the property. They are going to participate in the cash-flow, they are doing to participate in the upside of the property, that is why they want to be equity partners, it is a good deal they want to participate in the upside.
The bad news for you as a sponsor is when you want to re-finance the property or pull a bunch of money out because you can’t manage it properly, you pay out the equity partners and they are still owners in the deal.
So equity partners are easy to raise money from because everybody wants to take part in the upside but debt partners you can re-finance right out of the deal. That’s the difference. Hey if you have more questions put that in comments below and I might answer that next week.