Real estate businesses have grown to be a lucrative field across the globe. There are however two options to go for while sourcing for financing. Both equity and debt financing will give you the money you need for your real estate projects. The choice however will affect your returns directly. Here is how.
Equity is generally expensive in comparison to debt. This is because equity has an opportunity cost. With everyone investing in real estate, you are sure to face stiff competition. Unless you are providing seven star products, and your marketing is exclusive, it will take a while before the returns come your way. There is a possibility that the money you invested would have given more returns in another investment. Nobody knows really, research well before putting all your life savings in real estate business.
Equity also means that a company sells shares to investors who will own part of the business. Most investors expect a return promised on their contribution. Chances are that clients will be in and out of the estate, with others deferring or worse defaulting payment. With this in mind, it could be extremely difficult to deliver the returns investors expect. The real estate business has its ups and downs. It is prudent to set rates of return that are favorable to the company in case the business hits its lows.
Equity can however come in handy in case one has never been in the business before. At this point an individual or start up companies can consider equity as the best option since they cannot access business loans from banks. Contribution from family members and friends is expected back, with interest, but you have a little freedom. In fact, you can have a grace period extended to you with no worries of losing property. Family members will willingly give back the cash if you have an expansion plan with no questions.
Equity provides a perfect alternative for debt. You do not have to pay back investors right away.. When the investment does not work out as expected, as some of your skin is in there, the investors will sink with you. When they were extending the money to you, they were ready for any outcome. The success of the business is also their success.
The bitter part about equity is that investors own part of your estate. If you give away majority of the shares investors could even control your estate, decide when to sell if they feel like and all transactions involving the estate. Any decisions including expansion plans will require the direct involvement of your partners.
You could choose debt to fund your real estate business. Just like equity, debt has its pros and cons. In case you choose debt to finance your real estate business, you will be required to pay back. Secured loans offered by banks have monthly interests and other charges. The charges vary from different bank to bank. It is prudent to do a deep research so that you get the best deal for yourself.
When getting a loan to finance real estate, your estate will be used as a security to get the loan. In case you are unable to pay back the loan due to factors discussed above, you might end up losing your estate as collateral. Such policies need that you choose debt when you are sure of returns from the investment.
Debt financing requires you to have guarantors for you to secure a loan. Your credit payment history will also be looked into. Where the business does not give back returns as expected, the guarantors will start being charged. That might cause trouble with whoever helped you get the loan, in case you need future guarantors they cannot help you.
Sometimes debt will require refinancing. That means that you have to get another loan to pay the previously secured loan plus the interest. This is true especially when you plan to expand your estate. Rates change due to economic cycles. The business will suffer when the second loan has higher interest and gain in case the second loan has a lower interest.
In conclusion, finding the correct mix of debt and equity will ensure that the business does not suffer all cons of choosing to use one of the financing methods.