Preferred Equity Real Estate Investing

Investing in real estate can be a great way to diversify your portfolio and really make your money grow. But breaking into this investment opportunity can be cost prohibitive if you don’t have access to a ton of cash up front. Preferred equity is one way smart investors do it. 

What is preferred equity exactly, and how can you use it to get into the world of real estate investing? Read on to learn how preferred equity works, why it’s different than the “normal” type of equity you may be more familiar with, and to determine whether or not you should consider investing in this distinctive part of a real estate capital stack. 

What is Preferred Equity?

Preferred equity is a unique type of financing that may be a viable option for those looking for an alternative to the traditional method of investing in real estate. It’s commonly used in large, commercial real estate investments, and it offers investors added security as well as leverage on capital by offering a return to specific classes of equity holders first. 

Preferred equity investors hold a senior position that results in payments just behind any that are made to primary mortgage lenders. Any time cash flow (profit) is produced, payments would be made to the senior lender first, then to preferred equity investors, and then to common equity investors. 

Preferred Equity vs Common Equity

Preferred equity vs common equity can be explained simply as a group of investors (the preferred equity holders) who are placed into higher seniority in terms of a return on their investment. In this case, preferred equity investors enjoy a fixed return and will be paid before common equity investors would be. Distribution of cash flow would go toward repaying debt first, then toward being dispersed to preferred equity investors, and finally, the remaining profits would then be distributed to common equity holders. 

Keep in mind that while both preferred and common equity investors hold ownership interest in a real estate investment, unlike with secured debt, equity investments are not secured. This ultimately means investors don’t have any type of direct recourse to an asset or property should a deal go south.

Preferred Equity in Real Estate

In real estate, preferred equity is just one part of the overall real estate capital stack, and developers use this type of financing as part of their whole capital raise for a project. Known as a hybrid product, preferred equity is attractive to investors for the simple reason that it offers priority payments to them before others. 

Is Preferred Equity a Good Investment

Preferred equity can be a great opportunity for real estate investors interested in a hybrid risk/return profile. Offering more leverage for less cost, when projects perform well, the fixed rate return offered through priority payments can be a real win-win. By contributing to the overall capital stack on a project, preferred equity investors enjoy all the benefits, with a little bit less risk than some other types of investments.   

Preferred Equity Investments with Connect Invest

Preferred equity real estate investments are one of the top methods used for wealthy investors looking to diversify their portfolios and reap the benefits of large-scale real estate projects. Connect Invest makes investing in real estate a possibility. Ready to get started? Learn more about the investment opportunities available when you work with Connect Invest.