Should You Use Debt or Equity on a Private Money Deal?

Should You Use Debt or Equity on a Private Money Deal?

1 min read
Matt Faircloth

Matt Faircloth, co-founder and president of the DeRosa Group, is a seasoned real estate investor. The DeRosa Group, based in historic Trenton, N.J., is a developer and owner of commercial and residential property with a mission to “transform lives through real estate.” DeRosa creates partnerships to finance select real estate investments and has a proven track record of providing safe, profitable investment opportunities to their clients.

Experience
Matt, along with his wife Liz, started investing in real estate in 2004 with the purchase of a duplex outside of Philadelphia with a $30,000 private loan. They founded DeRosa Group in 2005 and have since grown the company to hundreds of units in residential and commercial assets throughout the East Coast. Under Matt’s leadership, DeRosa has completed tens of millions in real estate transactions involving private capital, including fix and flips, single family home rentals, mixed-use buildings, apartment buildings, and office buildings.

Matt is an active contributor to the BiggerPockets Blog and has been featured on the BiggerPockets Podcast three times (show #88, #203, and #289). He also regularly contributes to BiggerPockets’ Facebook Live sessions and teaches free educational webinars for the BiggerPockets Community.

Matt authored the Amazon Best Seller Raising Private Capital: Building Your Real Estate Empire Using Other People’s Money. The book is a comprehensive roadmap for investors looking to inject more private capital into their real estate investing business and is a must-read for anyone looking to grow their business by using private lenders and equity investors. Kirkus, the No. 1 trade review publication for books, had this to say about Raising Private Capital: “In this impressively accessible introduction to a complex subject, Faircloth covers every aspect of private funding, presuming little knowledge on the part of the reader.”

Matt and his wife Liz live in New Hope, Penn., with their two children.

Education
Matt earned a B.S. in Industrial and Systems Engineering with a minor in Business from Virginia Tech. (Go, Hokies!)

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Whether you’ve never raised private money before or do it regularly, you can structure that money as a loan (debt) or by giving the investor ownership in your deal (equity). Today, we are going to talk about when to use debt versus equity when you’re raising private money to fund your real estate deal. So, where to start?

Self-Directed IRAs

Let’s talk about my favorite investment vehicle, self-directed individual retirement accounts (SDIRA). A self-directed IRA is a special type of retirement account, one that used to be a 401k belonging to an employee of a company. Once that employee leaves the company, it can be rolled into an IRA account and then moved to a company that allows them to operate it as a self-directed account. This way, they can place the money into assets of their choosing. They can invest their retirement account into many things, such as stocks, precious metals, real estate purchases, or as a loan to another person. When considering how to structure the deal, the first thing to think about is the source of the money. Let’s start with debt and when to use it. Debt is better for short-term deals, especially if sourced from a self-directed IRA. Many passive investors have SDIRA accounts that can be positioned into your deals. Be sure to watch the video for more on this.


Related: The 5 Best Investments in My Self-Directed IRA

Cash

Another very common investment vehicle is cold, hard cash. If the money is cash, then equity might be a better play. In this situation, cash can hold certain types of write-offs like depreciation of the asset being an owner. This can provide them great tax advantages that are only available to investors who invested with their own cash into the deal, not an SDIRA.

In the video attached, I get into other factors like investment timeline to determine which to use, debt or equity. Check it out to hear more!

What other factors need to go into evaluating which investment vehicle to use? What’s been your experience?

Please leave a comment below so we can have a conversation! Thanks for reading and watching and have a great and profitable week!