The Best Investment Opportunity You Might be Overlooking
Private credit provides solid risk adjusted returns relative to other options today
Photo from Pexels
Right now, you can get equity-like returns (11-14%) with significantly less risk.
Today, I’m going to show you how. (Along with what, why, and where.)
My goal is to teach you how to build generational wealth through real estate investing. But real estate investing isn’t always as simple as buying the right multifamily equity deals.
In some markets, the right deals are harder to come by than in other markets. And instead of trying to force the issue and getting stuck in a bad deal, we prefer to “take what the defense is giving us”.
Right now, the defense is giving us a tremendous opportunity in the private credit market. As we head into summer, preferred equity deals in particular have massive potential. Today, we’re going to break them down.
We’ll look at:
The benefits of preferred equity deals.
Why I’m investing in these deals right now.
How you can invest in these deals, too.
What is preferred equity?
To understand preferred equity, you need to understand the capital stack —- the sources of capital used to purchase and finance a property.
In the capital stack, preferred equity falls between debt and equity.
Preferred equity is repaid after senior debt, but before common equity. So when cash flow is distributed or when the property is sold, preferred equity holders get paid before common equity holders.
Preferred equity acts as a hybrid between debt and common equity, offering some of the benefits of both, like providing fixed dividends while maintaining the potential for capital appreciation.
Not every deal uses preferred equity, but those that do give you the opportunity to invest in a more “preferred” position on the typical capital stack.
Why should I invest in preferred equity?
Preferred equity funds are currently offering better risk-adjusted returns than most pure equity deals. We’re seeing 11-14% returns with relatively low risk.
Before, I used the analogy “taking what the defense gives you”. You see this idea play out time and time again in investing. Sometimes it takes the form of “Don’t fight the Fed”. Sometimes, it says “Don’t go against the grain”.
It might take different forms, but the idea is still the same. Don’t let your preference for one asset class blind you to the opportunities in other vehicles when they become available. And in preferred equity, that time is now.
As a bonus, preferred equity funds are more cash-flow heavy than real estate. When you’re getting a 5-6% preferred return like you might in real estate, though, that doesn’t move the needle much.
But 12-15% of legitimately passive income? That’s enough to pique my interest.
In short, here are a few reasons I’m bullish on preferred equity funds today:
Liquidity
Monthly cash flow
Consistency over time
High returns with lower volatility
Preferred position in the capital stack
Act like individuals, invest like institutions
Oh, and one other thing:
This is exactly what the institutional players are seeing.
If you keep a close eye on real estate deals like we do, you’ve noticed that more and more preferred equity is popping up in real estate deals. Institutional investors are looking at high interest rates and opting for debt and preferred equity as more attractive risk-reward options.
When rates are lower, there’s a wider delta between debt and equity returns. But in a high-rate environment, that gap shrinks.
The banking crisis of 2023 also caused banks to pull back in lending, creating a void in deal financing. Private credit firms have stepped in to fill the gap and command lucrative terms to do so. This supply-demand imbalance creates opportunities for investors.
Wall Street banks and fund managers like Goldman Sachs, Morgan Stanley, and Oaktree Capital have all jumped into this market.
Most people don’t realize they can invest like the “big boys”. But preferred equity funds are available to accredited investors. In fact, they’re one of the most accessible ways of investing like institutions.
Photo from Reuters
How can I invest in preferred equity?
At Clara Investments, we’ve been evaluating several private credit funds over the past few months.
Recently, we selected one that stood out from the rest of the crowd, and we’re excited to share it with our investors.
If you’d like to get access to that fund, you can join our Investor Club for free here: https://clarainvestments.com/invest.
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