Preferred Equity is a type of equity investment in real estate that combines the best of both the debt and equity worlds. While it is subordinate to the debt, it is senior to the common equity and developer’s profit share. Generally, credit risk associated with preferred equity is lower than common equity.
Since preferred equity pays out a deferred return at the time the property sells, there are no monthly cash flow payments to investors. This makes the 18% preferred return investors receive similar to accrued interest.
What is the Advantage of Preferred Equity?
While there are many advantages to preferred equity, here are a few of the key advantages:
- Higher returns,
- more control through direct ownership,
- more information and transparency,
- institutionally underwritten high quality investments,
- no foreclosure expense,
- and more!
Sample Project Scenario
Our current project started construction on this week. Located within a gated community in Monterey, California. During the 10-month construction period, preferred equity investors will not receive any monthly cash flow payments. Once the property is finished and sells, proceeds from the sale will be distributed as follows:
- First, to pay off the construction loan
- Second, to pay the Preferred Equity investors their capital plus their 18% accrued return
- Last, to pay off common equity and any developer profit
Therefore at time of sale, a preferred equity investor who initially invested $100K would receive $118K (assuming the property sold at the end of one year).
As the developer, DiversyFund receives profits from the sale of the property after the preferred equity investors receive their 18% return in full. This means that we only take on projects that we are extremely confident in. Due to our financing capabilities, we have brokers constantly bringing us attractive off-market deals and of the deals we review, we develop less than five percent.
Is it secured against the property?
Yes. For each property, we form a new single asset LLC and preferred equity investors receive direct ownership in that LLC.
When do I start earning interest?
An investor’s 18% preferred return starts accruing the day that the investor’s funds clear compliance This is typically 2-5 business days after wiring the funds.
How do I track my investment?
DiversyFund sets up a trust account per offering, so there is no commingling of funds. Even more so, an independent bookkeeper and CPA tracks and reconciles these accounts. All projects are posted on our social media feeds, so you can see real time construction progress.
Additionally, we send out monthly construction updates, which will show your preferred return accrual that you’ve earned to date on your investment. Once DiversyFund 2.0 is completed over the next month or two, you will be able to see your entire portfolio online as you would a stock brokerage account.