A common part of the capital stack for real estate investments is a portion of the capital via debt financing. Debt is in contrast to equity in that debt is secured by collateral and typically has a fixed (or pre-determined) cost of borrowing (e.g. interest rate) and doesn’t fluctuate based on reported gain or profit upon exit.
Therefore, debt can be a very powerful tool when investing in real estate. I say powerful because with “great power comes great responsibility.” The lender typically has broad, discretionary power to demand responses and outcomes from the borrower or face foreclosure.
Therefore it is essential that every borrower understands the terms and obligations they agree to when accepting a debt partner.
The main documents are as follows:
- Term Sheet
- Commitment Letter
- Loan Agreement
- Promissory Note
- Borrower Obligations and Covenants