The Internet has opened up a whole array of new opportunities for property investors. Shared investment, overseas properties, development funding and property bonds are some of the more popular options today. A number of companies are now offering the opportunity to participate in property bond funds. This allows multiple investors to take a share of a property bond fund which will ultimately lend money to a range of developers at a predetermined interest rate.
Ability to diversify property investments
If you are involved in a property bond fund then your investment (from as little as £25,000) would be accumulated with other investors and spread amongst a number of property deals. This gives you diversification on type of transaction, perceived risk and return. The vast majority of property bonds are relatively short term, between one year and two years, which in part reduces the overall risk.
When you bear in mind UK base rates are near their historic low, the opportunity to lock in double-digit returns on property bonds is very attractive. The interest can be paid in a variety of ways including monthly, annually or rolled up until the final capital repayment. It is in the best interest of companies offering such property bonds to work with reliable developers with a solid reputation.
If for example we have a £2 million development (£1 million property acquisition and £1 million development costs) then the overall cost will be £2.2 million, including interest at 10%, over a one-year period. This will be secured against the property and it is common for funds to be released across an array of stages when certain conditions have been met.
If for example, £200,000 was spent on roads, drains and other services for the property then you would expect this to increase the market value by more than £200,000. So, as work is completed and each stage payment is made released, the market value of the property development should in theory always be greater than the sum of funds released and those yet to be released.
If we take the above example, with a project costing £2.2 million in total (including finance costs), we will take a look at the traditional exit route. Where a commercial property is being redeveloped into flats/apartments the market value upon completion could conceivably be £4 million. Upon completion of the project the developer would look to re-mortgage, which on a 70% loan to value ratio would be £2.8 million. This would be used to pay off the £2.2 million in total development costs leaving a profit of £600,000 and equity of £1.2 million in the development.
Working with reputable companies
While the risks are minimised using stage payments and various conditions for the release funds, there is a risk with any property development investment. This risk can be mitigated even further by dealing with reputable that have a good track record and solid finances. In the vast majority of cases, companies bringing investors together to create a property bond fund will also invest themselves. As a consequence, you can take it for granted they have done all of their research and due diligence on the development and the various parties involved.
Contact FJP Investment for details of property investment opportunities for you.