Colorado Debt Investing or Equity Investing – What Is The Difference

by David Gerlitz on February 23, 2011

Colorado Debt investing and equity investing make up the different financing layers of an investment whether it be stocks or real estate.

Colorado Debt Investing or Equity Investing - What Is The DifferenceTo simplify, you can think of an equity investment like owning a stock, and in fact owning stock is a form of equity investing. The equity type of investing typically comes from personal savings and allows you to be a shareholder in the company. It is typically the investment with the highest risks and highest returns because it is the first to take a haircut if the investment loses money.

Debt investing is much like owning a bond, or acting as a private lender. You invest your money in the company and receive a set rate of return. You don’t own part of the company but carry a note with the underlying investment as collateral. If you do not receive the return, you can foreclose on the investment. Debt investing is typically considered less risky than equity investing because any losses taken will come after the equity investors; however there are all kinds of hybrid investments within the pyramid of investing including preferred equity and preferred debt.

Investment Property Debt Investing or Equity Investing

Consider an investment property with an estimated value of $800,000. The equity in the property is $200,000 and there is a debt investment (a note) for $600,000. The debt investors receive a fixed return of 6%. If the cash flows drop and the property is then only valued at $600,000, the equity investors have lost their investment if they sell. If the cash flows return and the value increases to $1,000,000, the debt investors receive the same return but the equity investors have doubled their “equity” from 200 to 400K.

If you would like to find out more about becoming a Debt or Equity Investor, give me a call at 720-306-8017 to find out more!

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