Investing as a “Debt Partner”

Most of this website describes a form of investing where the investor is an “Equity Partner”.  What this means is that the investor has an equity stake in the asset.  They are a partial owner.  We also work with another type of partner that we call a “Debt Partner”. A Debt Partner, rather than having an equity stake, has a debt stake.

Think about when you purchased your home.  You likely got a mortgage through the bank.  In doing so, the bank provided most of the money (minus the down payment) needed to purchase the property.  In return, you pay the bank back a certain amount of interest (and maybe principal) each month.  The bank isn’t a partial owner of your home.  You own the entire home, but the bank has actions it can take if you don’t “perform”/make your payments as you should.  If you don’t make your payments the bank can foreclose on your home and it then becomes the bank’s property.

Becoming a Debt Partner gives you a chance to truly “be the bank” and provide us with a mortgage.  You provide an investment amount and we pay you a fixed amount each month which is independent of how the property is performing.   We like to say that each investment opportunity we have is unique and depends on the specific asset we are acquiring.  This really applies to our Debt Partner program, but here are a few examples that can help explain what is happening.

Hypothetical Example 1:  We are acquiring a property for $100,000 that is worth around $150,000.  We are getting a formal loan from a bank for $80,000.  We would then have a Debt Partner opportunity to provide the final $20,000*.  For this opportunity, we might be able to offer promissory note terms of 6%* interest with interest-only payments* for a 5* year period.  What this means is the investor would receive 6% interest annually ($1,200 per year) paid out monthly at $100 per month.  These payments would continue each month for 60 months, or 5 years.  The $20,000 investment would be returned to the investor at the end of the 5 year period.  Each place where you see an asterisk (*) is one likely number or term that could change for any given investment opportunity.  This $20,000 loan would be in “second” position.  The formal bank loan would be in “first” position.  A second position loan has a higher risk associated with it because the loan in the first position would have the first opportunity to take action if we did not make payments as we should.

Hypothetical Example 2: We are acquiring a small property for $50,000 that is worth $70,000.  We have a Debt Partner opportunity to provide the $50,000 necessary to acquire the property.  This opportunity would provide a loan in the first position (less risk) and we might be able to offer promissory note terms of 5% interest with interest-only payments for a 5 year period.  This would result in yearly payments of $2,500 (monthly payments of $208.33) for 5 years.  At the end of the 5 year period, the $50,000 investment would be returned to the investor.

These investments are secured by the real estate.  This does not mean that the payment is guaranteed, but it does mean that the investor has recourse if we don’t make the payments.  The investor can actually foreclose on us and they get a property that is worth $70,000 (or whatever it is worth at that time).  Now, let’s be realistic.  We don’t want that to happen because it means we have not performed as we said we would.  You don’t want this to happen because you don’t really want to have to deal with the property, do you?  We frankly can’t imagine this ever happening on anything we choose to purchase, but Debt Partnership has lower risk than Equity because it could happen and you would have a path for recourse.