In this episode of Real Estate Runway, Chad delves into the art of using debt to maximize earning and staying power. He explains the differences between short-term, medium-term, and long-term debt and how to optimize proceeds for the best outcome. Chad emphasizes the importance of considering the longevity of loans and avoiding high interest rates that may not benefit you in the future. He also explores ways to optimize debt in uncertain times, such as using short-term bridge debt or buying an interest rate cap. Tune in as he explains how each type of debt impacts your earning and staying power.
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[00:00 - 07:58] Understanding the Importance of Debt in Real Estate
The capital stack, particularly debt, is the most important aspect of any real estate deal
Debt can make or break a deal, and the different flavors of debt can impact staying power and earning power.
Overly leveraged deals can minimize staying power and negatively impact cash flow
Cognizing the importance of debt can help investors maximize earning power and minimize staying power
[07:59 - 15:24] Understanding Debt Management in Real Estate
Loans for real estate can be classified as short-term, medium-term, or long-term
Life companies usually focus on long-term debts due to their preference to allow the invested money to grow
Locking a long-term rate for a loan when interest rates are high may not be the best decision
It is best to focus on medium to short-term debt for optimization of proceeds to avoid regretting when rates drop in the future
[15:25 - 23:09] Lessons on Mezzanine Debt and Preferred Equity
Mezzanine lenders use equity pledges as a way to secure their position and ensure their money doesn't get lost to the senior lender
Mezzanine debt and preferred equity are similar in terms of their economic impact, but preferred equity also shares in taxable losses and depreciation
Mezzanine and preferred equity lenders can provide additional financing to a deal, but they charge more than senior lenders and their risk is higher
The cost of capital can be optimized by blending senior debt with mezzanine or preferred equity, but it's important to consider staying power and the ability to service debt
“Debt can make you or break you. It can make a wonderful deal better, and it can make a wonderful deal awful if you do it.“ -Chad Sutton
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Real Estate Runway Podcast is all about alternative business and investment strategies to help you amplify life, and maximize wealth! Click here to find out more about the host, Chad Sutton.