You might think the only way to benefit from property is by spending time researching an ideal location, placing the perfect tenants and finding a suitable management company. But what if you could get someone else to do all that hard work for you and still reap the benefits?
Loan Note Investment or “Property Bonds” offer one way to gain exposure into property markets, at a much lower entry level, by becoming the lender instead of the landlord.
Here’s how they generally work…
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A potential investor agrees to lend a property developer an agreed amount of money, set over a lending term of normally 2, 3 or 5 years.
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The Developer then uses the aforementioned money to fund their development projects, and in exchange they agree to pay the investor a fixed return over a set period of time.
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Just like a bank, the investor is then usually given a secured legal charge on the property asset as their protection.
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At the end of the term the Developer agrees to repay the original loan, remove the legal charge and the investor walks away (or reinvests).
For passive investors, loan note investments can put your money to work straight away, and also offer some advantages vs the numerous obstacles that might be faced trying to build your own property portfolio.
The advantages of Property Loan Note Investment
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You can receive a fixed income over a set period of time with an agreed exit point.
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Unlike traditional buy-to-let, there is no dealing with tenants, and no surprise damages or hidden maintenance costs to keep you awake at night.
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No complicated taxation rules and no extra costs like stamp duty or legal fees.
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Chosen carefully, you can gain the partnership of an established developer with many years of experience and a team of professionals behind them.
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The lower entry point could also allow you to benefit from a more diverse portfolio, by spreading smaller sums of capital over a wider range of developers and projects.
Why don't the Developers just lend from the Banks?
It seems that since the financial crisis of 2008, banks are much more risk adverse with lending in order to meet their new holding requirements.
Although bank lending has greatly improved, the days of obtaining 100% development finance are long gone. Today, most lenders offer around the 60-65% mark, leaving a much bigger gap to fill. These extra upfront costs and longer decision times mean developers are naturally looking at other ways to raise money.
Over the years, JV (joint ventures), crowdfunding, peer to peer lending, property bonds and loan notes have all become established ways for developers to raise money as they offer advantages over traditional bank financing.
