Lend or Own? A Note vs a Membership Interest in a Deal
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Some investors ask whether they should lend to an apartment deal instead of buying a share of it. A promissory note is a loan: you lend money and receive stated interest and repayment. A membership interest is ownership: you buy units in the deal's LLC and receive a share of cash flow and sale proceeds after the lender is paid. The two sit in different places in the deal, and they carry different risks.
If you are the sponsor, we built DoorRaise so investors can buy LLC membership interests in a deal, with the documents, escrow and K-1s handled for them. This guide is for investors who want to understand the difference. It is general information as of November 2026.
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What is a promissory note in a deal?
A promissory note is a written promise to repay a loan with interest on set terms. In a deal, a note may be made by the deal's LLC or by the sponsor, and the proceeds may fund part of the purchase or renovation. The note states the rate, the maturity, the payment schedule and any security the lender has.
A note is paid before equity. If the deal sells for less than expected, the note holder is usually paid first, from the sale proceeds, before the members see anything. That is the protection. The cost is that the note holder usually does not share in any extra upside above the stated interest.
What is a membership interest?
A membership interest is a unit of ownership in the LLC that owns the apartment building. You are a member, and the operating agreement sets how cash flow and sale proceeds are split, often with a preferred return and then a share of profits above it. Our post on membership units explains how ownership is measured.
Equity gets paid after debt and any note holders. If the deal does well, equity can earn much more than a fixed rate. If it does poorly, equity can lose its full investment. The preferred return is a target for distributions, not a guarantee.
How do the two compare?
| Feature | Promissory note | Membership interest |
|---|---|---|
| What you hold | A loan to the deal or sponsor | Ownership in the deal's LLC |
| Payment | Stated interest and principal on set terms | Distributions when cash is available, and sale proceeds |
| Place in repayment | Usually ahead of equity | Behind debt and any notes |
| Upside | Usually limited to the stated rate | Can be higher, and can be zero |
| Downside | Loss if the deal cannot repay the note | Loss of the full investment |
| Usual tax form | Form 1099-INT for interest | Schedule K-1 from the partnership |
| Securities rules | Apply, including exemptions | Apply, including exemptions |
A worked example with made-up numbers
This example is illustrative. Assume you have $100,000 to put into a deal, and the deal sells for less than planned.
| Item | Illustrative figure |
|---|---|
| Deal's sale proceeds after debt (assumed) | $80,000 |
| Note: $100,000 at a stated rate, repayment first (assumed) | Paid first, up to the amount owed, from the $80,000 |
| Equity: $100,000 invested, paid only after the note | Receives whatever remains after the note, which is $0 in this case |
The example shows the trade. In a weak sale, the note holder may recover part or all of the principal, while the equity holder can get nothing. In a strong sale, the equity holder may earn far more than the stated rate of a note. Neither outcome is a forecast.
What should you check before lending or buying?
- Who the borrower is. A note from the property's LLC is different from a note from an individual sponsor. Ask who signs and who is liable.
- Security. Find out whether the note is secured by the property or is unsecured. Ask where it sits in the lender's order and whether other debt is ahead of it.
- Equity below you. A note is only as strong as the equity beneath it. Check the equity raise and the lender's loan terms.
- Offering rules. Notes are securities too. Ask whether the offering is limited to accredited investors, and how the sponsor is using a Rule 506 exemption. Our post on Regulation D and 506 explains the basics.
- Tax reporting. Ask whether interest will be reported on a 1099-INT, and talk to your CPA about how it fits your return.
- Maturity. Know when the note must be repaid and what happens if the deal has not sold or refinanced by then.
Our take
This is DoorRaise's opinion, not financial, legal or tax advice. DoorRaise deals sell LLC membership interests, not notes, because investors who want a share of the property's cash flow and sale proceeds should own it. A note can make sense for some investors, especially those who want a fixed rate and priority of repayment, but it should be read as a loan, with its own risks.
Trade-offs and who this is not for
- Not for you if you need equity-style upside and can accept a full loss, or if you want the note to be liquid.
- Be careful if a sponsor offers a note as a "safe" alternative without explaining the borrower, the security and the equity below it.
- Common mistake: treating a fixed rate as guaranteed. It is a promise by the borrower, and the borrower may not be able to pay.
FAQ
Is a promissory note safer than a membership interest?
It has higher priority for repayment, but it is still a risk. If the borrower cannot pay, the note holder can lose money too.
Do notes earn more than equity?
Not necessarily. Notes usually pay a stated rate that is capped. Equity has no cap, and it can also earn nothing.
Can I hold a note in my IRA?
Possibly, depending on the custodian and the rules that apply. Our self-directed IRA guide covers the questions to ask.
Does DoorRaise sell notes?
No. DoorRaise deals offer LLC membership interests.
Sources
- IRS: About Form 1099-INT
- Offering exemptions are summarized in our Regulation D guide.
This article is general information, not tax, legal or investment advice. The example is illustrative. Talk to a CPA and an attorney about your situation. DoorRaise is not a law firm, broker-dealer, investment adviser or funding portal.