Debt or Equity? That is the Question
Picking the Correct Structure Depends on Your Goals
by Matt Rodak
H ow you structure the financing for your fix-and-flip projects can have a big impact on your net profit. Maximiz- ing how much hits your bottom line is certainly important. There are, however, a few other factors I like to weigh when determining how to structure my deals. Risk and Reward Balancing risk and potential returns is very important. In addition to the capital I’m risking as an operator, I’m also putting my time at “risk.” Operators should al- ways be compensated for their time when thinking about risk-adjusted-return. Speed and Ease Speed is very important to be able to
close good deals. I’m usually willing to pay a slight premium for ease-of-use. My time has value, and spending too much time structuring deals is an op- portunity cost for me when I could be working on or finding more deals. Cost of Capital This has the biggest impact to my bottom line. What’s the total amount I “pay” for access to capital? There are certainly many creative ways to fund your deals but, broadly speaking, they all fall into one of two categories: Debt or Equity. Debt is when you receive capital from a lender and in exchange you promise to pay back the amount received plus
some fixed rate of return (interest). The lender will typically take a secured interest in the property via a mortgage and oftentimes will also require that you sign personally, giving the lender additional recourse. Equity is when you receive capital in exchange for membership units (LLC) or shares (S-Corp) that give the investor a share of the profits generated from the joint venture. The organizing documents of the entity will outline how profits are split. There is an in- finite number of variables that can be introduced to structure the deal so that profits are split as you agree. So let’s look at how I like to think about each of the factors I previously
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