There are many ways to invest in property and many types of investment. We’ve all heard the expression ‘as safe as houses’ and the UK property market has a history of resilience providing some fantastic year-on-year returns for property investors.
However, becoming a buy to let landlord is not easy, as for those that find property an attractive investment don’t necessarily have access to the amount of money required to purchase a property. Or even if equipped with a deposit, buying with the aid of a mortgage might not be feasible or may reduce annual yield too greatly, making it not so viable.
So, while traditional methods require a significant amount of cash, which in turn can make a significant annual return, there are alternative ways to invest into the property market – one way is property bonds or loan notes.
What is a property bond or loan note?
Property bonds / loan notes allow you to invest into the property market. They are popular in the real estate development industry, as developers have valuable assets to secure the loans against.
As an alternative to owning bricks and mortar, investors are attracted to a high return on their capital with a conveniently short-term exit strategy – plus the entry level is low, often from only £5,000.
Property bonds / loan notes essentially are an IOU. You are giving a loan to a property development company, the amount you wish to invest, for a pre-stated number of years – commonly two to five.
The bonds or loan notes have a face value, this is the value you buy them for, and this is the amount the bond issuer pays back to you when the bond matures – the end of the loan period. You know from the start, exactly how long your money will be tied up for.
Bonds and loan notes are known as fixed income products. There is an annual or bi-annual (product dependant) amount of interest the bond issuer pays the bondholder.
So, in summary, bondholders earn annual interest, plus receive their money back at the end of the loan period. It’s important to mention, this type of product (financial promotion) is restricted to Self-certified Sophisticated Investors or Self-certified High Net Worth Individual.
How does a property bond or loan note work?
- Property bonds or loan notes, as mentioned are IOU’s from a company to an investor.
- You are making a loan to the company and the company is agreeing to pay it back with a fixed amount of interest.
- Interest is commonly high – between 8% – 12% per annum.
- Interest options can be a quarterly, bi-annual or annual payment or deferred to the end of the investment term – effectively a lump-sum at the end.
- This investment product is for a short-term period. e.g. two years.
- Property bonds or loan notes can be secured or unsecured – with secured being the safer option.
- Property bonds or loan notes are a Financial Promotion under section 21 of the Financial Services and Markets Act 2000(FSMA). This means it has been approved for individual property investors.
- Financial Promotions should have Section 21 sign-off by a company that is authorised and regulated by the FCA.
- The investment term starts as soon as the bond or loan note amount has been paid in full.
- At the end of the investment term, your initial capital is returned in full, along with any interest owed.
How to find the best fixed rate property bonds / loan notes
Research the product and the developer / property company
There is a level of risk with all investments, however due diligence on the company that is offering the property bond or loan notes is key to finding the best fixed rate product in this sector. Look carefully at the history, credibility and terms offered by the provider.
Naturally, look for a very reputable company with a:
- proven track record.
- a history of paying investors promptly.
- a large and diverse portfolio in various defensive sectors e.g. PRS, affordable-housing, commercial – this helps alleviate risk in one specific sector.
- successful delivery of projects on budget
- pre-sale strategy
- prestige and credibility of its partners/pre-sale buyers
Fixed interest rate product and structure
Property bonds usually have fixed rates of annual interest over a fixed term. There may be a choice on how these are repaid either throughout the investment term – quarterly, bi-annually – or at the end in one lump-sum. With this option, if deferred until the end, it can sometimes earn the investor a higher percentage during the investment period.
Ensure it’s secure and an asset-backed investment.
Investors look for opportunities where their capital is protected as much as possible, but the ROI is high. In the case of property bonds and loan notes ensure the company has the investments secured against its property and land – these are considered some of the safest options available. For example, first legal charge over land and properties. Some products have an Independent Trustee appointed to represent and work on behalf of bond/loan note holders.
Ensure bonds and loan notes is the right type of property investment for you
Investing into property bonds or loan notes is a clear and simple way to invest into the property market and can be a far simpler and hassle-free process, when compared with a traditional property investment.
When buying a property for investment purposes, there is often many things that need to be considered, for example additional costs on top of the purchase, like solicitor fees, stamp duty, council tax, involving estate agents, plus the tenancy challenges, insurance payments, maintenance fees, etc.
Property bonds and loan notes offer a far simpler option for investors allowing them to simply invest their capital with a more hands-off approach, receive a high annual yield on a short-term investment – for investors that are looking for a quick exit strategy it’s definitely a consideration. However, if you do not feel comfortable not owning a tangible property asset the best fixed-rate bond or loan note on the market will still not meet your criteria.