Benzinga and Yahoo Finance LLC might earn commission or revenue through certain links. Real estate investments mainly fall into two main categories: equity and debt. In equity investing, one owns a part of the property itself. In contrast, debt investing involves lending money that is secured by real estate. Each approach has its own distinct advantages and drawbacks.
Debt Investments: A Structured Approach to Lending
Debt investments essentially act as loans. An investor lends money to an individual or entity and, in return, gets periodic interest payments and the full return of their initial investment on a predetermined date. For instance, Jeff Bezos-backed Arrived Holdings shows that investors seem to favor debt products. Since Arrived launched its debt product – the Private Credit Fund (PCF) – it has sold 3.8 times more than the company’s equity fund ($16.6 million for the PCF versus $3.8 million for the Single Family Residential Fund).Arrived’s Private Credit Fund has a historical yield of 8.1% and has $23 million in assets with 11,703 investors. The fund has been so popular that Arrived set a $5,000 investment limit for December. Unlike equity investments where investors share ownership, debt investors act as creditors, providing capital with the expectation of repayment including interest.Key characteristics of debt investments include:Fixed or Variable Returns
Debt investments usually provide a fixed income stream through interest payments. The interest rate or coupon rate can be fixed or variable. A fixed rate remains the same throughout the investment term, while a variable rate adjusts based on a benchmark index.Principal Repayment
At the maturity date, the original investment amount or principal is returned to the investor. This is different from equity investments where capital appreciation mainly drives returns.Credit Risk
Debt investments carry different levels of credit risk, which indicates the possibility of a borrower defaulting on interest or principal payments. Higher-risk investments generally offer higher interest rates to compensate for the increased risk.Market value fluctuations of debt investments can occur with changes in interest rates and credit risk perceptions. However, investors who hold debt securities until maturity generally receive the full face value.Various debt investment vehicles exist, such as municipal bonds, real estate debt, corporate bonds, high-yield bonds, and distressed debt. Each type has unique risk and return characteristics. Investors should think about their risk tolerance and investment goals before investing in these asset classes.Arrived enables individuals to invest in shares of rental properties with as little as $100, offering the potential for monthly rental income and long-term appreciation without the troubles of being a landlord. With over $1 million in dividends paid out last quarter and a growing number of properties in different markets, Arrived provides an appealing alternative for investors looking to build a diversified real estate portfolio.In October 2024, Arrived sold The Centennial, achieving a total return of 34.7% (11.2% average annual returns) for investors. Arrived aims to keep delivering similar value across the portfolio through careful market selection, attentive property management, and well-timed sales.Looking for fractional real estate investment opportunities? The Benzinga Real Estate Screener has the latest offerings.This article originally appeared on Benzinga.com.READ MORE