Would you prefer a debt partnership or Equity partnership with your investors?

[Thurben James]

So I was talking with my mentor about acquiring a property to boost my networth. So he proposed an idea I've not heard before which was raising capital from investors and having your investors be treated as 2nd position lenders. So to convey what I'm talking about imagine you did a syndication and you needed to raise 500k from investors and for the sake of an example you offered a 7% preferred return. Well in this new model you would essentially pay your investors 7% in the form of a debt service, therefore when you decide to do a cash out refinance you pay your lenders their 7% and you own all the equity in the property that you acquired. The risk you run with this model though is you would risk being over leveraged since your using 100% debt, and you would need the property to have a high cashflow amount each month to cover Capex, insurance, debt service, and your normal expenses associated with the property (property management included). So would you do an equity partnership or debt partnership ? Why or Why not?

[Chris Seveney]

@Thurben James

Sounds great but try and find an investor who will take only a 7% return to be in second position and 100% LTV and sponsor has zero skin in the game….