Comparing Common Equity vs. Preferred Equity: Which Is Right for You?

Real estate syndications are built on a complex financial structure known as the capital stack. At the top of this stack are the equity investors or those who own a piece of the property and share in its profits.

But not all equity is created equal. Investors typically choose between common equity and preferred equity, two very different positions with distinct risk profiles, benefits, and return expectations.

So, how do you determine which is right for you?

Whether you’re a seasoned investor or exploring real estate syndications for the first time, understanding the key differences between common and preferred equity is essential for making informed, strategic decisions. In this article, we’ll define both types of equity, compare their core features, and explore when each might be the better fit for your investment goals.

What Is Common Equity?

Common equity represents the most basic form of ownership in a real estate deal. It typically occupies the top layer of the capital stack, meaning it’s the last to be paid out in the event of profits or losses.

Holders of common equity earn variable returns that depend entirely on the property’s performance. They also get voting rights and ownership control, giving them influence over major decisions, including refinancing, renovations, and sale timing.

What Is Preferred Equity?

In contrast, preferred equity sits between debt and common equity in the capital stack. While it doesn’t offer the full ownership privileges of common equity, it provides a more stable, contractually defined return.

Investors of preferred equity are paid before common equity holders and may have an arrearage clause. This entitles them to catch-up payments if distributions are delayed. However, they usually have limited or no voting rights, and their upside is capped.

Key Differences at a Glance

Here’s how common equity and preferred equity differ across several important criteria:

Risk Level

● Common Equity: Carries the highest level of risk in the capital stack.

● Preferred Equity: Considered a medium-risk position, offering more security than common equity.

Position in the Capital Stack

● Common Equity: Sits at the very top—paid last after all other obligations.

● Preferred Equity: Positioned just above common equity and below debt, with a higher payout priority.

Returns

● Common Equity: Offers variable returns based on property performance, with no guaranteed payouts.

● Preferred Equity: Typically provides fixed or contractually defined returns, offering more predictable income.

Control and Ownership

● Common Equity: Often includes voting rights and decision-making influence on major property actions.

● Preferred Equity: Generally lacks voting rights and does not include control over decisions.

Upside Potential

● Common Equity: Has unlimited upside, with the potential for higher long-term gains if the property appreciates.

● Preferred Equity: Returns are capped, meaning limited exposure to property appreciation.

Payout Priority

● Common Equity: Last in line for distributions, only paid after all other stakeholders.

● Preferred Equity: Paid before common equity holders, and sometimes receives arrears if payouts are delayed.

Risk and Reward: Understanding Your Investment Profile

Like many investment decisions, comparing preferred and common equity starts with understanding your comfort with risk and your desired outcomes.

Common equity is best suited for investors with a high-risk tolerance and a long-term outlook. These investors are willing to forgo early cash flow in exchange for the potential of

higher returns from property appreciation and net income after obligations are met. Common equity could be the better fit if you:

● Are comfortable with greater risk in exchange for higher return potential.

● Have a longer investment horizon and can tolerate delays in cash flow.

● Want a true ownership position and a say in property-level decisions.

● Are investing in value-add or opportunistic properties with significant potential appreciation.

Preferred equity, on the other hand, appeals to investors who value predictability and cash flow. They receive steady, contracted returns and are paid out before any profits reach the common equity holders. This makes preferred equity a great option for conservative investors, especially in volatile markets. Preferred equity might be the right choice if you:

● Are seeking consistent, lower-risk returns.

● Want early and regular payouts during the investment lifecycle.

● Prefer minimal involvement in property-level decisions.

● Are investing in a stabilized or core property with limited value-add upside.

Conclusion

With traditional lenders tightening their grip and $544 billion in CRE loans set to mature in 2025, equity is playing a more critical role in real estate deals than ever before.

For developers and sponsors, preferred and common equity offer flexible ways to structure deals and raise capital. For investors, the choice between the two depends largely on whether your priority is stability or upside.

Both common and preferred equity have an important role to play in real estate investing. There’s no one-size-fits-all answer—just the right fit based on your goals, time horizon, and risk appetite.

If you're seeking predictable returns and downside protection, preferred equity may be ideal. But if you're in pursuit of long-term growth and can weather short-term fluctuations, common equity offers unmatched upside.

At Makaan Investment Group, we help investors navigate both structures through carefully vetted syndications in high-demand markets. Schedule a consultation with us today to discover which equity strategy aligns best with your financial objectives.