This is a YouTube video titled "Credit vs. Equity Investing In Real Estate" containing a discussion among multiple speakers about the comparative advantages of credit versus equity investments in the current real estate market environment. The conversation includes detailed examples of investment structures and risk considerations, with a disclaimer from the hosts of the White Coat Investor podcast. The speakers are not identified as Jim Dahle.
Stepping back and looking at the options for an investor investing in credit versus equity these days, obviously you have funds that do both of these things and so you've got a little bit of a bias here. But if you are an objective investor, which one are you more excited about right now? Which one seems more attractive to you right now from an investment perspective?
You know, it's hard to not love credit today. You know, the risk today. I mean, we all know it's a more volatile market today than it's been in a while with the interest rate environment and what that's caused in the banking sector and so forth. And we also own a bank as well and actually buying another bank right now. And so we know the banking side really, really well. But the credit side's hard not to like given, you know, because of the increase in interest rates and because the lack of traditional financing that's out there from banks, the ability to get double digit yields in a credit position with very little volatility cash flow immediately, not a lot of risk. If you're investing with a good lender who knows how to manage credit risk effectively, it's hard not to like. And the saying that I've heard for a long time is the smart money is on the credit side. You know, it's sexier, it's more fun, there's bigger upside. Being on the equity side, it's exciting owning something. But being on the lending side, we get the majority of the upside with a lot less downside. But I'd also comment that our equity funds are kind of a. I would consider it more of a mix between debt and equity because there's always subordinate equity to us. So I'll give you an example right now. It's not one I love in the respect that I'm not happy about this for some investors. So we have a deal right now in Texas where we have about a $15 million equity investment into a really nice apartment community. But due to some of the challenges with the interest rate environment, we did the deal as prep equity with a sponsor, so with a syndicator, a sponsor who went out and raised money into the deal. So we $15 million in our money in first, our money ahead of the sponsor's equity. Well, the sponsor raised $5 million of equity from individual investors, probably some doctors, and their equity is sitting behind the lender and behind our $15 million. Our $15 million gets all the cash flow first. We get all our $15 million back plus a 17 or an 18% IRR return on our money before the sponsor and his investor gets any money back. And long story short, right now, unfortunately, the investors who invested directly with that sponsor, they're going to have all of their money wiped out. They're going to walk away with $0. So they're not going to have gotten any return and lose all of their investment while our investors are going to end up with a 17 or an 18% return. So, you know, that's an example of being where you sit in the capital stack is really, really important. And sitting in the lender position is almost always the lowest risk position. But sitting ahead of, you know, the top of the common equity, which is how we invest ahead of that common equity, reduces our risk and increases the consistency of our returns.
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