Is it Wise to Invest in a Debt Ridden Commercial Property

Debt is a loan provided to the property owner or investor with a fixed rate of return and term. This is typically paid out monthly & payback is secured against the property.

When investing in real estate debt instruments, the investor acts as a lender to the property owner or the deal sponsor.

The loan is secured by the property itself and investors receive a fixed rate of return that is determined by the interest rate on the loan & the amount they have invested.

In a debt deal, the investor is at the bottom of the capital stack which means they have priority when it comes to claiming a payout from the property.

Here are the advantages and disadvantages associated with investing in a debt-ridden commercial property. Advantages Disadvantages Shorter hold time Lower risk Steady income Capped returns Higher fees

Advantages

Shorter hold time

Debt investments are generally associated with development projects. Due to which, they typically have a stronger holding period, compared to equity investments.

Depending on the nature of the deal, the hold time may last between 6 and 24 months, which is an advantage for investors who are not comfortable tying up assets for the long-term.

Lower risk

Due to the way in which the deals are structured, investors take on less risk with debt investments.

The loan is secured by the property, which acts as an insurance policy against repayment of the loan.

If the property owner or sponsor defaults, then investors have the ability to recoup the loss of their investment through a foreclosure action.

Steady income

Debt investments are more predictable in terms of the amount and frequency of return payouts.

While every deal is different, it is not unusual for investors to earn yields ranging from 8% to 12% annually. These returns are paid on a monthly or quarterly basis.

Disadvantages Let us look at some of the cons associated with investing in debt-ridden commercial properties.

Cappedreturns

Debt investments entail less risk, but one major downside is the fact that returns are limited by the interest rate on the loan.

Investors have to be clear about whether they are willing to sacrifice the potential to earn higher yields in exchange for a safe bet.

Higher fees

While most real estate crowdfunding platforms don't charge investors anything to create an account & research, but usually, some type of fee is collected to participate in a deal.

The crowdfunding platform usually takes a percentage off the top before any interest is paid out, which can eat into your returns.

There may also be a separate loan organization fee that is passed on to investors.

Finally

These are some of the advantages and disadvantages associated with investing in a debt- ridden commercial property.

You must keep in mind the above-discussed factors while investing in commercial properties so that it is beneficial for you in the long run.

Thank You!