In Part II, we’ll dive into two more options: preferred equity and seller financing. These options can offer unique benefits and challenges, and we’ll explain everything you need to know to make an informed decision.

Preferred equity:

Investor covers 0-10% of property purchase with Preferred Equity

Preferred equity is a hybrid financing option that combines features of both debt and equity financing. It typically involves raising money from investors in exchange for a fixed return and a share of ownership in the property.

Family offices and other institutional financing companies are often the primary providers of preferred equity. Preferred equity gives investors a priority claim on cash flows and assets, similar to debt, but with the potential for higher returns, similar to equity. Unlike common equity, preferred equity does not confer ownership or voting rights in the underlying asset. Instead, preferred equity investors receive a fixed or floating dividend that is paid out before any distributions are made to common equity holders.

Preferred equity is often used in real estate investing as a way to bridge the gap between debt and equity financing. It allows investors to access capital without diluting ownership or control of the property. Preferred equity can also be structured to provide downside protection for investors by including covenants that limit the amount of debt that can be placed on the property or requiring certain levels of occupancy or cash flow.

For multifamily investments, preferred equity can be a useful financing option for investors who want to maximize their returns while minimizing their exposure to risk. It can be used to fund acquisitions, development projects, or repositioning efforts, and can be an attractive option for investors who want to participate in the upside potential of a property without taking on the full risk associated with direct equity ownership.

Overall, preferred equity can provide investors with a more secure position in the capital stack while still offering the potential for attractive returns. It’s important for investors to carefully consider the terms and conditions of preferred equity investments, including the priority of payments, the dividend rate, and any covenants or restrictions that may be in place.

Seller financing:

Investor covers 10-30% of property purchase with Seller Financing

Seller financing, also known as owner financing or a purchase-money mortgage, is a financing option in which the seller of a property agrees to lend the buyer a portion of the purchase price. The buyer then makes regular payments to the seller, typically with interest, over an agreed-upon term. Seller financing can be an attractive option for buyers who may not qualify for traditional financing or who want more flexible terms than those offered by banks and other lenders.

In the context of multifamily investments, seller financing can help bridge the gap between the purchase price of a property and the amount of debt financing available from traditional lenders. This can be particularly beneficial for investors who are looking to acquire properties with value-add potential, as they may be able to secure more favorable terms from the seller than from a traditional lender. Seller financing can also provide the seller with a steady stream of income and potential tax benefits, making it a win-win for both parties.

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