Investing in Debt

Investing can take one of two forms, Equity investing or Debt investing. The former is typically more well known as compared to the latter. Debt investing refers to debt instruments that provide a set scheduled interest payment through time. Debt investments do not provide any equity in the entity taking on the debt but the debtholder is given precedence over the shareholder in the event that the company goes under. Debt investments can found through different platforms highlighted below:
Investing in Local Businesses using NextSeed
NextSeed offers the opportunity to loan money to local businesses such as restaurants. NextSeed was the first funding portal in the U.S. registered with the Securities and Exchange Commission (SEC) and is a member of the Financial Industry Regulatory Authority (FINRA). The minimum needed to start investing on the platform is as low as $100. Interests are typically paid monthly depending on how the debt is structured. The debt can be structured as a term note or revenue sharing note. Term notes have a specified interest rate over a set period of time and are issued under the applicable note purchase agreement. The business will make fixed monthly payments during the term of the note, and will pay the unpaid balance (including any accrued interest) to the investor on the maturity date.
Instead of requiring a business to pay a fixed amount each month over a certain period of time (as typically required under a term note), a revenue sharing note on NextSeed requires a business to pay a fixed percentage of its monthly gross revenues until a predetermined total amount has been paid. The platform provides detailed information on any business listed on the site. An offering statement is required by the SEC and the investor has accessibility to the financial statements of the businesses listed on the site.
Municipal BondsMuni Bonds typically generate 5-6.5% in stable income when accounting for the impact of taxation. Taxes can eat into the returns we realize from different investment vehicles. Long term capital gains tax rate is around 15% and short term capital gains are taxed at the ordinary income tax bracket which can vary from 10-37% depending on annual income. The interest earned from Muni Bonds are exempt from taxes boosting the net returns achieved. Just like other investment vehicles, there is some associated risk and Municipal Bonds are no different. However, Muni Bonds have a relatively lower risk when compared to corporate bonds or the stock market. It is possible to purchase risk-free Muni Bonds that are insured and although, not very common, they do exist and I do own some insured Muni Bonds in my portfolio. Each Municipal Bond has a credit rating that helps assess the amount of risk involved. The Moody ratings range from Aaa bonds (strongest category of creditworthiness) to C bonds (weakest with a relatively higher risk).
Peer-to-Peer LendingAnother type of debt investment is peer-to-peer lending. This is simply the practice of lending money to an individual or business for a specific return on the principal loaned. Similar to most investment vehicles, peer-to-peer lending has a varying amount of risk-to-return profile. The more risky loans typically have a higher return but it is important to be mindful of the credit rating for each of these loans. Typical returns within this space can range from 3-8% on average and the length of the loan can vary from case to case.
Real Estate Debt InvestmentsIndustries have always been disrupted by technology for decades now, revolutionizing the way we do things and making them more efficient. The real estate industry has not fully caught up yet, till now. Fundrise, a technology private firm based in Washington D.C, has been a pioneer in expanding the availability of investing in the real estate industry to a much broader class of people. Fundrise offers different funds tailored to investors. Income seeking investors have the opportunity to select the supplemental income plan Fundrise offers on their platform. The supplemental income plan includes funds such as the income eREIT II fund as well as other funds. Each fund consists of different properties to offer geographic diversification. The beauty with Fundrise is the ability to invest with as low as $100 in large scale real estate projects and earn truly passive income within the industry.


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