3 Compelling Reasons to Choose Debt Over Equity

Have you been thinking about investing in real estate? While investing in the equity side of real estate is the most common and these investments often grab the headlines, the debt side of real estate can offer a range of benefits that are worth exploring. Here are three compelling reasons to consider investing in debt over equity:

1. Stability and Predictability of Returns

In the world of investments, stability and predictability are often cherished qualities. Debt instruments, such as bonds, fixed-income investments, and in the case of real estate debt funds or notes, are known for providing just that. When you invest in debt, you can count on regular interest payments and the return of your principal amount at maturity. This predictable cash flow can be a boon, particularly for those who rely on investment income, such as retirees. If you value financial peace of mind, debt investments can be a wise choice.

Source: [Investopedia - Debt vs. Equity: Advantages and Disadvantages](https://www.investopedia.com/ask/answers/042315/what-are-advantages-and-disadvantages-debt-vs-equity-financing.asp)

2. Lower Risk Profile

Risk management is a critical consideration for investors. Debt investments generally come with a lower risk profile compared to their equity counterparts. In the unfortunate event of a real estate project facing financial difficulties or foreclosure, debt holders often have a higher priority when it comes to repayment than equity holders. This means that, in challenging economic times, debt investors may have a better chance of recovering their principal investment. Lower risk can be especially appealing for those with a more conservative risk tolerance or those nearing retirement.

Source: [The Balance - The Advantages and Disadvantages of Debt Financing](https://www.thebalance.com/advantages-and-disadvantages-of-debt-financing-393120)

3. Portfolio Diversification

Effective diversification is a cornerstone of sound investment strategy. Debt can play a crucial role in diversifying your investment portfolio. By including a mix of assets like bonds and other fixed-income instruments, you can spread risk and reduce the overall volatility of your portfolio. This diversification can help safeguard your investments from market downturns, ensuring a more balanced and resilient portfolio.

Source: [Charles Schwab - The Importance of Asset Allocation](https://www.schwab.com/resource-center/insights/content/importance-of-asset-allocation)

While debt investments offer these advantages, it's important to acknowledge that they also carry their own set of risks, such as interest rate risk and credit risk. The choice between debt and equity investments should align with your financial goals, risk tolerance, and the overall composition of your investment portfolio. Consulting with a financial advisor can provide valuable guidance to help you make informed investment decisions tailored to your specific needs and circumstances.

Debt investments offer a compelling alternative to equity, providing stability, lower risk, and the potential for effective portfolio diversification. Understanding the nuances of both asset classes is key to constructing a well-balanced investment strategy that aligns with your financial objectives. So, whether you're a seasoned investor or just starting on your investment journey, consider the potential benefits of debt in achieving your financial goals.

Want to get started investing in the debt side of real estate? Contact Us

Danny Swett September 11, 2023
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