Every real estate project is built on two essential sources of capital: debt and equity. These are the two sides of the capital stack, and together they determine how projects are financed, who gets paid first, and how investors participate in returns.
For investors, the question often becomes: should I put my money to work on the debt side, the equity side, or both? Understanding the differences between these strategies, and how they complement one another, is key to making informed decisions.
What Debt Investing Looks Like
When you invest in real estate debt, you are effectively stepping into the role of lender. Rather than buying property, debt investors provide financing that borrowers use to acquire, improve, or stabilize projects.
Debt has several defining characteristics:
- Contractual returns: Investors earn interest at a set rate, typically paid monthly or quarterly.
- Collateral security: The loan is backed by the property, giving investors recourse if the borrower defaults.
- Defined time horizon: Loans have fixed maturities, often ranging from six months to several years.
Private debt funds are a common way for investors to access this strategy. These funds pool investor capital and make loans on multiple projects, spreading risk across a portfolio. Investors receive distributions as the underlying loans generate income.
Think of debt as the “income” component of real estate: reliable, structured, and focused on capital preservation.
What Equity Investing Looks Like
Equity is the ownership side of real estate. Equity investors put capital directly into a project or a fund that acquires properties. In exchange, they participate in the income generated by the property and share in appreciation when it is sold or refinanced.
Equity has a very different profile from debt:
- Variable returns: Income may start small but can grow over time, with large gains often realized at sale.
- Residual risk: Equity investors are paid after debt obligations, meaning they absorb more of the downside risk
- Upside potential: Equity can deliver strong growth when markets rise or projects exceed expectations.
Equity is often structured through syndications, partnerships, or funds, giving investors access to large-scale projects they might not pursue individually.
Equity plays the role of the “growth engine” in a real estate portfolio.
An Example in Practice
Consider a multifamily project valued at $20 million. A lender provides a $14 million loan, while equity investors contribute $6 million in capital.
- Debt investors receive steady interest payments on the $14 million loan, secured by the property. Their return is fixed by contract, and they will be repaid before equity investors see any distribution.
- Equity investors share in the net income after debt service. If the property appreciates to $24 million and is later sold, equity holders capture the $4 million gain after the loan is repaid.
In this structure, both sides play indispensable roles. Debt provides the majority of the financing and creates stability, while equity provides the flexibility to absorb risk and pursue growth.
Key Differences at a Glance
- Risk position: Debt sits higher in the repayment order, with collateral protection. Equity is residual and bears more risk.
- Return timing: Debt typically pays current income. Equity often backloads returns to refinance or sale.
- Volatility: Debt returns are contractual and stable. Equity returns depend on market performance and operations.
- Investment horizon: Debt tends to be shorter-term. Equity is usually held for five to ten years.
These distinctions are why many investors think about debt as a stabilizer and equity as a growth driver.
Portfolio Considerations
The decision between debt and equity often comes down to investor goals.
- Those who prioritize income and preservation of capital may lean toward debt strategies.
- Those who prioritize growth and tax efficiency may favor equity.
- Many sophisticated investors combine both, using debt to anchor a portfolio and equity to capture upside.
Importantly, neither is “better” than the other in absolute terms. Each fulfills a different role. The key is aligning the strategy with personal risk tolerance, time horizon, and cash flow needs.
Why Both Remain Relevant
Markets move in cycles, and both debt and equity have roles to play across those cycles. In periods of rising interest rates or uncertain valuations, debt provides predictability and collateralized protection. In periods of expansion, equity provides access to appreciation and long-term gains.
By understanding both sides, investors gain a clearer picture of how capital flows through real estate and how different strategies can be used together.
Conclusion
Debt and equity are not competitors; they are partners. Each represents a different way to participate in real estate markets, with distinct risk and return profiles. Debt provides stability and structured income, while equity provides long-term growth and upside potential.
For investors, the question is not simply “which is better,” but rather “which fits my strategy right now?” By appreciating how each side of the capital stack works, investors can design portfolios that are resilient, diversified, and aligned with their goals.
This article was prepared by Enact Partners as part of our investor education series.
