As an individual investor interested in real estate investing, it’s important to understand the various investment options available to you. While participating in the JV equity portion of a real estate transaction is one option, there are various different structures individual investors can tap into to access real estate or real estate-backed securities.
One option to consider is short term notes. In this article, we’ll walk through a definition of short term notes. We will touch on how short term notes are used in real estate finance and investing. And, we will discuss the benefits of investing in short term notes and how you can get started.
Short Term Notes, Defined
Short term notes, also known as promissory notes, are debt securities with a maturity of one year or less. They are issued by borrowers who need short-term financing and are typically used for working capital, inventory purchases, or to bridge gaps in cash flow. Short term notes can be a good investment option for investors who are looking for short-term, fixed-income opportunities with relatively low risk.
EquityMultiple’s mission has always been to make real estate investing easy and accessible. Since 2015, we have helped thousands of investors increase their exposure to real estate across different property types, risk profiles, and geographies. We believe that it has never been more important for investors to diversify their portfolios, and are excited to provide a more holistic wealth management platform.
Benefits of Investing in Short Term Notes
One benefit of investing in short term notes is the potential for higher returns compared to other fixed-income investments like treasury bonds. Since short term notes are generally used to finance smaller, short-term projects, they tend to offer higher interest rates to compensate for the increased risk. Another benefit is the short-term nature of the investment. Short term notes offer investors the opportunity to earn passive income without committing to a long-term investment. This flexibility can be appealing to investors who prefer shorter investment horizons or who want to maintain liquidity.
In short, investing in short term notes can potentially carry the following benefits:
- Short duration and relatively strong liquidity options.
- A cash management solution distinct from savings accounts and CDs, which may offer a compelling APY
- An alternative to fixed-rate instruments that may offer returns less correlated to public markets.
Investing in Short Term Notes
Investing in short term notes can provide investors with a reliable source of passive income. EquityMultiple allows investors to participate in short term notes, pool their funds with other investors, to provide a financing vehicle for EquityMultiple (more on that in a bit). This allows individual investors to gain access to investment opportunities that they may not have been able to access otherwise. Investing in short term notes through a fintech platform can also provide diversification benefits by spreading investments across numerous underlying assets.
Depending on the structure of the short term note offering, these investments may offer compounding benefits. EquityMultiple’s Alpine Note, for example, compounds across the term, contributing to a compelling APY (annual percentage yield) in the landscape of options.*
Alpine Notes are a natural extension of EquityMultiple’s existing offerings. Here are a few highlights:
- It provides a yield-focused cash management tool, EquityMultiple’s first such product.
- It provides the shortest hold periods yet, for maximum liquidity.
- It provides another means of diversification and short-term yield.
How is the Note Different From EquityMultiple’s Other Investments?
One of the main differentiators is the Note’s short duration. Real estate investments are typically illiquid assets, meaning investors’ money can be tied up for years, until the sale of the property or another capital event. Alpine Notes, however, allow investors to get their principal back quickly. In a persistently low-interest rate environment, many investors will rejoice at an opportunity for attractive current yield from a relatively liquid investment.
EquityMultiple’s real estate investments are structured to offer the maximum degree of investor protections. Diversified Notes go even further to mitigate risk, since EquityMultiple takes the first-loss position in the case of default. Oh, and as an added bonus, there is no fee to invest.
How Short Term Notes Are Used in Real Estate
Short term notes function similarly to corporate bonds: they are short-term credit instruments that are secured against the collateral or assets of the issuer. Real estate investors and developers often use short term notes to finance projects, increasing their capacity to invest across a number of opportunities. These notes can be used to fund construction projects, purchase inventory, or to cover other short-term expenses. Since short term notes have a relatively short maturity, they can be a good option for real estate developers who need financing for a shorter period of time than traditional bank loans allow.
EquityMultiple issues short term notes to serve a treasury function for the platform. Capital raised for the Alpine Note is used to pre-fund real estate investments on the platform. In other words, to offer “surety of funding” to sponsors or operators who are seeking financing on the EquityMultiple platform. By offering short term notes, EquityMultiple not only brings investors an attractive short-term investment product, but the platform also increases its capacity for funding real estate projects, which contributes to a more robust and diversified flow of investments for individual investors who use the platform. We view this as a “win-win-win” for EquityMultiple, our sponsor partners, and individual real estate investors.
In summary, short term notes can be a great option for individual investors interested in real estate investing. They offer the potential for higher returns than other fixed-income investments, and their short-term nature provides flexibility and liquidity. Investing in short term notes through a platform like EquityMultiple can provide individual investors a great way to begin participating in real estate-backed investments while accessing a flexible tool for cash management.
If you have questions about Short Term Notes or any of EquityMultiple’s other investments, please feel free to schedule a call, or contact us at ir@equitymultiple.com.
*Source of leading CD rates is www.fdic.gov/resources/bankers/national-rates, as of 3/21/2023. APY based on rates offered as of March, 2023. Actual interest rates offered will vary based on duration and time at which they are being offered. Returns are not guaranteed. This product is not offered by a bank and as such it is not FDIC insured. However, to help Alpine Note investors, EquityMultiple offers First Loss Protection (see FAQ on First Loss Protection at equitymultiple.com/alpine-note).