Capital stack

You might think that equity is money that you invest yourself. But that is not the whole story.

Debt is money you raise by borrowing against the value of your hotel. The lender provides money and earns interest for letting you use the money. You repay the money through principal payments. Essentially, each principal payment buys you a little more equity. Lenders provide you money in return for interest payments; they make money from lending you money. Because the debt is secured by the value of the hotel, their risk is controlled (the hotel is the lender’s “collateral”). If you do not pay the mortgage (monthly principal/interest or the balance at maturity), the lender can foreclose on (take ownership of) the hotel.