Preferred equity investments are attractive to many investors because of their stable returns and lack of risk. Unlike common equity, preferred equity investors don’t have to take the risks associated with loan-backed investments. Instead, they receive a secure, predictable return without the need to be involved in the business beyond writing a check. This type of investment can help investors meet their real estate and financial goals.
Preferred equity investors often work as joint venture partners with developers, and their relationship is detailed in limited partnership agreements or limited liability company agreements. The developer and preferred equity investor share the daily management of the company or partnership, but the preferred equity investor approves all major decisions. Normally, the preferred equity investor is repaid through priority distributions. In some cases, these distributions are accrued over a period of time, but in many cases they are scheduled to be paid out on a certain date.
Investors in preferred equity should know the risks and rewards associated with this type of investment. They should be aware that unlike common equity, preferred equity investments require higher initial investment amounts and may not be suitable for all investors. In most cases, preferred equity investors need to be accredited and have proof of net worth. Moreover, most transactions require an investment of at least $100,000. Preferred equity investing is not risk-free, but it is a safer bet than investing in common equity. The higher risks are usually compensated by higher returns.
Preferred shares often offer higher dividends than common stocks and may have tax advantages in the U.S. Straight preferreds yield two percent more than 10-year Treasuries. Preferreds also rank ahead of common stocks in the event of bankruptcy. Preferred equity also has a call feature, which means that in the event of a company’s bankruptcy, preferred stock can be repurchased by the company at a higher price.