Investing in property is attractive to many people. After all, the returns can be significant. The problem, however, is capital, i.e. having access to funds to invest in property.
In other words, while you can make significant sums of money investing in property, you need significant sums of money to start. There is a possible solution, however – investing in property bonds.
Traditional Methods of Property Investing
The most common traditional methods of investing in property include:
- Property flipping – purchasing a property and then reselling it for a higher value, often following renovation work
- Becoming a buy-to-let landlord – purchasing property to rent to tenants
- Developing property – purchasing land and building on it
All these types of investment require access to money. That means money to purchase the land or property outright, or access to finance to make the purchase.
Property bonds let you invest in the property market with a much lower amount of capital. Here’s an example of how property bonds work:
- A developer plans a new construction scheme. This could be either a commercial or residential property development.
- Instead of seeking finance from banks or other lenders, the property developer issues bonds to raise the funds required to complete the development.
- Land purchased to develop the scheme, and the development itself, are often offered as security for those investing in the bonds.
- You can then become one of many investors purchasing the bonds. The investment you make is usually for a fixed term which is typically between three and five years.
- The developer uses the money raised from the sales of bonds to proceed with the project.
- Typically, you will get a return, either quarterly or yearly, on your investment. Depending on the property bond you choose, this is normally between five and 12 percent.
- At the end of the fixed term, you can take out your investment along with the total return.
The developer of the property can generate the money to pay you a return on your investment in a number of ways. The most common are:
- Refinancing the property
- Using proceeds from the sale of the property
- From rental income
Property Bonds Are Not Just for Small Investors
As already mentioned, property bonds have a much lower entry barrier making them an investment option if don’t have access to capital. Property bonds are also attractive to high-value investors too.
High-value investors can choose to become the developer or buy-to-let landlord, but this involves getting directly involved in the property. Many investors, however, prefer a more hands-off investment option. In other words, they see the potential for return in the UK property market, but don’t have the necessary time or experience.
So, those investors purchase bonds, effectively performing the function of a bank, i.e. giving developers access to funds.
Of course, there are risks involved with all investment opportunities, and property bond investing is no different. Even though the UK property market often gives a good return on investment, this is not guaranteed. This means you should always make sure you get good advice to satisfy yourself this investment is right for you.
If it is, property bonds allow you to invest in property if don’t have large amounts of capital, or if you want a hands-off investment opportunity. Inventing in property.