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

In This Article

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!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.