Property bonds are available to private individuals that are searching for an alternative investment that provides above average returns. But what are property bonds, how do they work, are they safe, and what kind of returns should you expect? This quick, simple guide to property bonds provides everything would-be investors need to know.
What are property bonds?
Very simply, a property bond is a loan from an investor to a property developer. More and more property development companies are issuing bonds to raise the money they need to proceed with a project. Investors lend their money to the developer so the project can progress. In return, the investor receives a fixed rate of interest on the money they lend to the developer over a set period of time and once the bond matures, their initial investment (known as ‘the principle’) is repaid.
For investors, property bonds give them a chance to share in the profits made by professional property developers without any of the challenges associated with building, selling or letting the homes.
Every property bond is a legally binding contract between the investor (the lender) and the property developer (the borrower). That agreement will specify:
- How the money can be used by the developer
- How much interest is paid to the investor and when
- How the investors’ money is secured
- When the initial investment will be repaid
How do property bonds work?
Property bonds are usually bought in cash, but it’s also sometimes possible for an individual with a self-administered pension like a SIPP to invest using their pension, too. The property developer will use those funds to purchase and renovate properties.
The investors’ funds will be secured with a legal charge that’s registered on the title of the property at the Land Registry. That has the act of securing the bond. So, if something were to go wrong, the investor has a share of the property that they can use to reclaim the money they are owed.
Secured lending of this kind is commonly seen in a mortgage. We all know that if we are unable to make the repayments on a mortgage, the bank our mortgage is with will repossess and sell the property to recover the money they are owed.
It’s very similar in the case of a property bond. If the developer is unable to repay the make the necessary payments, the property will be sold so the investor can be repaid.
Other investments property bonds can be mistaken for
It’s not uncommon for investors to confuse other investment products with property bonds. For example, some investors assume a property bond must be a type of mortgage bond. There are a number of key differences between the two that make a significant difference to your investment.
Mortgage bonds were a big part of the cause of the financial crash in 2007. Mortgage bonds are secured against a mortgage or collection of mortgages. The problem comes when the mortgage a bond is secured against is a bad loan that the homeowner cannot afford to repay.
Property bonds are not secured against good mortgages, bad mortgages or mortgages of any kind. Instead, they are secured against a physical asset, namely property. If the bond issuer defaults on their payments or goes out of business, that property can be legally claimed by the investor to recover the cost of their initial investment.
Holiday property bonds
Holiday property bonds, more commonly known as timeshares, are products that give investors the option to use a holiday home throughout the year in return for their investment. There is no financial return for the investor in a holiday property bond. Again, this a very different product to a property bond.
Why are property bonds becoming increasingly popular?
The uncertainty surrounding Brexit caused domestic property investments to stall. That encouraged investors who were interested in the property investment class to look for another way to earn a healthy income on their capital. Rather than buying, renovating, selling and letting properties themselves, many investors have turned to investment vehicles such as property bonds.
They are convenient and easy to manage
Investing into the bricks and mortar of a property yourself takes time, costs money and can be stressful. There are also a huge number of considerations such as stamp duty, maintenance fees, tenancy issues, insurance payments and legal costs to take into account. With a property bond, you are not involved in the day-to-day development issues. All you do is invest your cash and generate returns from day one.