Understanding the Differences: Common Equity vs Preferred Equity Investment in Multifamily Real Estate
Common equity and preferred equity are two different forms of investment in multifamily real estate. Common equity represents ownership in the property through the purchase of shares of stock in the entity that owns the property. Investors who participate in common equity have the opportunity to share in the profits and appreciation of the property, but they are also exposed to the risk of loss if the property does not perform well.
Preferred equity, on the other hand, is a type of debt financing where the investor provides capital to the property in exchange for a fixed rate of return. This rate of return is usually paid before any distribution is made to common equity investors. Preferred equity investors do not have ownership in the property and do not share in its appreciation or depreciation, but they have a higher priority in receiving their return on investment. Additionally, Preferred equity investors have less control over the property operations compare to common equity investors.
It's important to note that Common equity investors usually provide capital to a property in exchange for an ownership interest and the ability to share in the cash flow and appreciation of the property. They also bear the risk of loss if the property does not perform well. Preferred equity investors, on the other hand, provide capital in exchange for a fixed rate of return, which is usually paid before any distribution is made to common equity investors. Preferred equity investors do not have ownership in the property and do not share in its appreciation or depreciation, but they have a higher priority in receiving their return on investment.
Common equity investors are usually long-term investors who are looking for a stable return on investment over an extended period of time. They are typically willing to accept a lower rate of return in exchange for the opportunity to share in the appreciation of the property. Preferred equity investors are usually short-term investors who are looking for a higher rate of return over a shorter period of time. They are willing to accept a higher level of risk in exchange for the opportunity to earn a higher rate of return.
In summary, common equity and preferred equity are two different forms of investment in multifamily real estate. Common equity represents ownership in the property, while preferred equity is a type of debt financing. Common equity investors share in the profits and appreciation of the property, but also bear the risk of loss if the property does not perform well. Preferred equity investors do not have ownership in the property, but have a higher priority in receiving their return on investment and typically have a fixed rate of return. Both forms of investment have their advantages and disadvantages and depend on the investor's risk appetite and investment horizon.