Hello and Happy New Year to all of our friends, associates and investors. It is truly a pleasure to speak to see so many joining our community and our business. As the only debt focused real estate platform, we occupy a vital niche in the real estate crowdfunding investment community - and in your portfolio.
In this fast growing space, I’m sure many of you reading this are probably familiar with other real estate crowdfunding sites. Most of them offer equity deals in real estate while a few also are adding a little debt in the overall mix of their offerings. Both equity and debt play a vital role in the diversification of risk and both should be looked at when making investment decisions for one's portfolio. There is one major difference between debt and equity in real estate that I’d like to address.
While equity holds the potential to generate cash flow, it is most often held for the purpose of creating an upside in capital gains over a number of years as the underlying asset appreciates. Like Einstein's rule of gravity where ‘What goes up must come down’, equity also has a downside risk, depending on factors such as: the economy, housing prices, tenant credit risk, and many more.
Debt on the other hand, is a strategy that certain well-connected or experienced real estate investors use to create a steady cash flow. In fact, debt can generate higher cash flow than equity, while having a greater level of security against the downside because debt is a fixed value, and while it doesn’t participate in the upside of the asset appreciation, it also does not fluctuate or participate in any downside depreciation. Patch of Land’s investments are calibrated to suit the kind of moderate risk we want and with that, we can determine the kind of returns we can generate with more certainty.
The difference explained above is the main reason that equity and debt have different returns. On the one hand, returns on equity can be estimated based on cash flow and capital gains over a number of years that gives an IRR (internal rate of return), it is projected based on estimates yet very difficult to accurately predict, especially as the years get further out. Equity is held for medium to long periods of 5 to 15 years.
On the other hand, debt gives investors a known number (yield) with a determinable risk to reward ratio before the loan is even made. Debt is held for shorter periods, usually 9 to 12 months, with some debt deals as short as 30 days. Debt gives almost assured returns that are known to the investor beforehand because they have been negotiated with the borrower. While there is a risk of losing money when lending funds, it is rarely the lenders who lose their entire investment because of the guarantees and 1st lien position secured against the underlying asset. When a debt deal is done correctly - with an appropriate LTV or ARV, then usually the lender will recoup their money plus some if the borrower defaults. To put it plainly, equity positions are the first into a deal and the last to get paid, while debt is the last into a deal but the first to get paid.
Here at Patch of Land, we are currently focusing our offerings on debt deals. It is 'crowdlending' amongst 'crowdfunding'. We plan to work with many strong developers around the country and cherry pick the best offerings for our investors. By staying focused on debt, and diversifying deal flow from across the country, we are able to take advantage of more deals, higher yields, and better able to calculate the level of risk associated with the debt offerings we bring to investors, thereby better serving you. We expect 2014 to be a year of great growth for our business, and for your portfolios!
Carlo Tabibi
Co-Founder & CEO
