Important: The information on this website is for sophisticated/HNW investors only. It is not a personal recommendation to invest. If you’re unsure, please seek advice.
Property loan notes can be an appealing complimentary asset to traditional investment property ownership as investors get the same cash-flow generation benefits of a property asset but without the hassle of actively managing tenants and costs such as stamp duty, solicitor fees, maintenance costs, and estate agent fees.
Essentially you are lending capital to a property developer to acquire and sometimes develop an exclusive asset typically only available to professional investors. The developers benefit as they can take on more properties deals due to increased liquidity via investors, and investors benefit as they gain an additional passive source of income/wealth building tool.
Some property developers offer security over the assets via a first or second charge over the asset and some are unsecured but typically offer higher interest rates to compensate the increased risk to investors.
Property loan notes customarily offer monthly, quarterly, biannual, yearly, or maturity payment frequencies of interest payments. The offerings are subject to negotiations which vary developer to developer but typically the higher the investment level, the longer the loan note term, the higher the interest rates and frequency of interest payments offered by the developers.
There are many different types of real estate which developers work on. From student accommodation and HMOs all the way to hotels and land development deals – make sure you pick a developer working in an area of real estate you are comfortable with and understand as an operating model.
Always check the property developers track record. Have they successfully acquired and developed real estate assets previously, and sold/refinanced for a profit? This decreased the risk profile compared to a brand-new developer with no track record.
Unless the capital raised via investors is used to acquire an actively cash flowing real estate asset, typically the purpose of funds is to acquire a property, develop it, then exit for a profit. The proceeds of which normally fund the repayment of principal invested as well as interest. Always check the projections to ensure there is enough profit built in to afford repayment of investors capital as well as interest and that there is a healthy enough profit margin for the developers to be incentivised – unless everyone wins, the old adage applies ‘if it’s too good to be true, it probably is’.
