Published by Forbes.com | July 22, 2023
Debt typically takes up a portion of the capital stack in a real estate investment and is often necessary to acquire a property.
Taking out a loan for a real estate investment may seem tougher than ever—especially for those new to the game. In the wake of three bank failures, rising interest rates, and a contraction of credit among lenders, clearly there are additional challenges in today’s market. In early 2023, Silicon Valley Bank collapsed, followed closely by the falling out of Signature Bank and then First Republic Bank, as reported in the Financial Times. In May, the Federal Reserve announced increased rates from 5% to 5.25% in an effort to tame inflation and spur job growth.
That said, debt typically takes up a portion of the capital stack and is often necessary to acquire a property. Once you’ve found a great opportunity, you’ll usually gather two main types of equity, known as preferred equity and common equity (I explained how these work in a previous article). The capital stack also includes layers of debt, which we’ll look at in depth here. These are senior debt and mezzanine debt, and it’s important to both understand what they are and how today’s lending environment could impact your financing activity.
Sourcing Senior Debt
Banks and lending institutions issue this type of debt, which is secured by a mortgage, or a pledge of the property. Senior debt could also be available from insurance companies and CMBS markets. (CMBS stands for commercial mortgage-backed security.) If payments are not made, the lender typically retains the right to take over the place through foreclosure. They can then resell the property to recoup their expected return.
