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What is real estate debt?
Real estate debt offers you another way of investing in property whilst diversifying your portfolio. Returns are largely based on rates charged on the underlying collaterised loan.
Benefits of real estate debt include passive income, lower volatility compared to other asset classes, reduced interest rate risk due to floating interest rate exposure and downside protection due to loan to value ratio covenants and first mortgage security.
Capital Stack
The capital stack refers to the structure of funding sources that support a real estate project. It is essentially the layering of different types of capital, each with its own risk and return profile. At Vest, we believe that a clear comprehension of the capital stack is crucial for investors looking to make informed decisions when investing.
Senior debt
Positioned at the bottom of the stack, senior debt is considered the least risky layer of the capital stack. Senior debt has the first claim on the property's cash flow and collateral, offering a lower risk but more conservative returns.
Mezzanine debt
Nestled in the middle of the stack, mezzanine debt carries a higher risk and, consequently, offers higher returns. Mezzanine lenders step in after senior debt providers, taking a subordinated position with higher risk and often having higher returns.
Equity
At the top of the stack is equity, representing the riskiest layer. Equity investors have the highest potential for returns as they share in the profits but also bear the brunt of any losses. This can include both common and preferred equity.