Real Estate Debt Investor vs. Real Estate Equity Investor
If you were just about to start your career - would you prefer to be a real estate debt investor or a real estate equity investor? And why?
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Probably equity but if it's a top shop there probably won't be too many doors closed either way. You're underwriting similar underlying assets but a different part of the cap stack. Tbh, a pro to debt is that you'll see more deals across your desk, but I'm sure there are some people who'd just rather be on the equity side; closer to the property.
For me, equity. I prefer dealing with the operational aspects of the property and determining the business plan upon acquisition. I always have found debt dull because you are provided a deal and business plan and you underwrite it the same, but there is no creativity (in my humble opinion). I also like the operational aspects of property.
How much of the operations are you really dealing with as the equity LP? Sure, you're more incentivized to become involved, but based on my experience, 99% of the operations are handled/driven by the operating partner
Depends on the LP. Some do deals with operators that they don’t want to deal with because they want the deal, and than 3 years later (or when stabilization is hit) they buy out the operator. My old firm was an ‘LP’ by the traditional sense, but we also had the in house capabilities to develop buildings and do heavy value add deals, and we would do it. So it just depends. Yes, the firm was an LP, but could do everything a GP could do, we just had to write large checks. We had fully staffed acquisitions, asset management, construction, etc. On top of that, being an LP, we had full control of the deal. The GP ‘worked’ for us. Many people forget that, sure, the GP is the operator, but many LPs can also operate deals and structure their JV so that they are in full control. Now..we’re we getting into tour new tenants on the multi family deals, no, and we weren’t doing property management, we left that to our PM or GP partner with a PM in house, but we were just as in the weeds of the numbers and decision making as our partner (on the asset management front).
How come everyone is so pro equity? What would be some arguments to be on the debt investment side instead?
Higher deal flow on average
Less likely to be constrained by geography or property type - Look at the portfolio of some of the public mortgage REITs or private debt funds. Apollo’s public MREIT comes to mind
Lower risk / attractive returns without taking equity risk - can be important as a significant part of your net worth should be tied to stock options or carry when you’re more senior.
Some people enjoy the credit / financial structuring analysis, although I’d argue you get exposure to this on the equity side too since you’re the borrower
Gimme that upside, baby!!!!
Debt's for losers man - equity's all steakhouses and bottle service.
In all seriousness, just depends what you want out of life. I'm on the equity side, and I like it because I find you are much closer to the real estate. Debt tends to be a volume game, so you can only spend so much time on any one deal. You're also receiving the deal once it's pretty much baked, and no borrower wants the lender's opinion on operations anyways.
I've found that people that jump out of finance into real estate tend to find their way onto the debt side because they enjoy the credit / structuring aspects. On the debt side, you're more focused on the broader market and will have a much better understanding of capital markets than someone on the equity side will have.
I'm on the debt side but want to get on the equity side eventually. Wouldn't you say it would be beneficial for an analyst type to know how to model different types of debt in the cap stack? I would assume an analyst on the equity side has to incorporate that somehow before presenting the deal, so some knowledge would be useful right?
Trying to convince myself the transition won't be too challenging.
Even with no experience in debt, I’d expect a competent analyst to be able to model a cap structure incorporating 1 or more types of debt, it’s not difficult. The transition won’t be too challenging, my team works across the cap structure and I think there’s really not that much difference between the two in terms of modelling / materials produced.
The key difference will be having to think through the business plan, and thinking through the assumptions with a lot more care. Given you’re at the bottom of the structure and not getting a fixed return, you need to be very comfortable with your assumptions.
I'd venture to say most optimistic young folks would be driven to the equity side for the prospect of a much larger payday. To date, equity funds raised have in general been much larger than debt funds + add the fact that the base case returns for equity are higher = larger carry dollars earned at an apples to apples level.
However, I'd be curious to hear others' opinions on whether more institutional dollars will be flowing into debt funds going forward. Debt fund sizes seem to be ticking up dramatically: BX DS raised $8B last year, GS MBD raised $4B+ in '18, etc.
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