When you invest in debt, you become the ‘lender’ and, to the extent that the borrower makes payments or amounts are otherwise recovered from the borrower, you receive a portion of interest and principal payments due on the loan. An investor in the debt part of the capital stack will not participate in the capital appreciation of a property, so the returns may not be as high as equity, but you are in a higher priority position to receive payments than an equity investor.
Equity holders, on the other hand, hold an ownership interest in a specific project. They receive a portion of the net profits (after expenses) that are generated from the project. Equity investments are typically riskier because they are unsecured. If there is only enough cash to cover debt payments, equity holders stand to lose principal. To compensate for the higher risk, returns are uncapped and based on the capital appreciation of the property.
