What is Preferred Equity & How Do I Invest in It?
There’s a significant opportunity in the current real estate market that you should have on your radar. Have you heard of “preferred equity” in the realm of commercial real estate investing?
Preferred equity is a unique part of the real estate capital stack that can serve as a smart way to enhance your passive real estate investments. If you haven’t explored this avenue before, now is the perfect time to consider it.
Initially, I used to think all equity was the same before delving into passive income through real estate. However, I learned that preferred equity offers distinct advantages, including potentially higher ROI and quicker returns.
While “preferred equity” may not be the most glamorous topic, the potential it holds for creating passive income streams outside of medicine is what excites me. It can pave the way for financial freedom and living life on your own terms.
But what exactly is preferred equity? It represents a type of ownership in a company or deal that typically gives shareholders priority over common equity holders in receiving dividends and proceeds from asset sales.
Preferred equity often provides fixed or adjustable-rate dividends, combining characteristics of equity and debt securities. In this article, we will explore the benefits of choosing preferred equity for commercial real estate investment and how to get started.
It’s important to remember that preferred equity is still equity, offering a potentially quicker path to higher returns, particularly in commercial real estate investments. However, due diligence is crucial.
Steady Income
Investors in preferred equity typically seek a balance between steady income and capital preservation. Preferred shareholders have a lower risk profile than common stakeholders but more risk than debt holders, leading to medium-risk projected returns.
Preferred equity investments often involve shorter timeframes for deal completion, allowing for quicker investment turnaround and maximized capital gains. With fixed rates of return, investors can enjoy predictable income streams.
Choosing between “current” and “accrued” preferred equity investments depends on your cash flow objectives and risk tolerance, offering flexibility in setting timeframes for returns.
Cash Flow
Preferred equity is prevalent in the market due to high-interest rates, presenting an opportunity to access commercial real estate investments that typically have a high entry point. While returns may be capped, preferred equity offers a level of predictability in cash flow.
- Educate Yourself: Begin by learning about preferred equity real estate investing, including its benefits, risks, and how it fits into your overall investment strategy.
- Research Opportunities: Explore various real estate investment opportunities offering preferred equity structures, considering factors like location, property type, and investment terms.
- Evaluate Risk and Return: Assess the risk-return profile of preferred equity investments, considering factors such as fixed returns, potential for capital appreciation, and the financial strength of the underlying real estate projects.
- Network and Build Relationships: Connect with real estate developers, sponsors, and investment platforms specializing in preferred equity deals to access opportunities and gain market insights.
- Perform Due Diligence: Conduct thorough due diligence on potential investments, analyzing financial documents and property fundamentals.
- Invest and Monitor: Once you’ve selected preferred equity investments, monitor their performance over time.
- Diversify Your Portfolio: Consider diversifying your preferred equity investments across different properties and sponsors to optimize portfolio performance.
- Stay Informed: Stay updated on market trends and economic indicators that may impact your investments.
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Don’t wait any longer to explore preferred equity opportunities in real estate that can bring you closer to financial freedom. Connect with us at Passive Income MD to collaborate, learn, and discover life-changing deals in the world of preferred equity investments.
Peter Kim, MD is the founder of Passive Income MD, the creator of Passive Real Estate Academy, and offers weekly education through the Passive Income MD Podcast. Join our community at the Passive Income Doc Facebook Group.
