Bure Valley Group is an investment brokerage business which links successful investors with exciting, innovative UK startups seeking funding. This content is for information purposes only and should not be taken as financial or investment advice.
Loan notes are a great option to consider if you are interested in investing in property. They can be described as legally-binding “IOUs”, between a property developer (seeking funding for a project) and an individual/institutional investor. The idea is that the developer gains access to much-needed funds to build an enterprise district or another property opportunity, and the investor gets their money back within a few years, with interest.
Property loan notes can be a great way for individual investors to gain access to property development opportunities which are normally restricted to large corporate investors, with the potential for high rates of return. Here at Bure Valley Group, for instance, we regularly offer loan note projects to our exclusive network of successful individual investors, following a thorough review of the opportunity to ensure maximal viability.
However, whilst there are considerable benefits for investors regarding property loan notes, it’s important to be aware of the risks and drawbacks as well.
We offer this short guide to help. If you would like more information about the EIS and loan note opportunities we offer here at Bure Valley Group, then please visit our portfolio. Alternatively, to request an official investment memorandum, please use our online form here.
Developing a car park, commercial zone or transport area typically requires a large commitment of funds to get the project going. This is traditionally why such projects are usually only available to large businesses which have the capital ready to invest. Property loan notes essentially “democratise” this area of the property market by allowing multiple investors (including individuals) to invest smaller amounts.
This can be particularly compelling for people who want to invest in property, but who live in an expensive part of the country. Buy To Let property prices in London, for instance, are usually well over £600,000, requiring a large deposit and often involving minimal returns once the mortgage and upkeep costs are subtracted from tenants’ rent. Property loan notes can open the door to invest lower amounts of capital, over shorter periods and with higher potential returns.
Similar to other property investments, however, there are risks involved. There is a market risk, for instance; i.e. an economic shock could lead to a fall in property prices. In such a scenario, the completed property project could end up being worth less than the total outstanding value of debt secured against the project.
You can mitigate this risk somewhat, however, by ensuring you include your property loan notes within an appropriately diversified portfolio. This means that other asset classes can help protect your net worth should the property market fall.
A Buy To Let property might offer varying returns over time. Your mortgage might go up, for instance, lowering your rent yield. Or perhaps you have to suddenly cover a large, unexpected cost (e.g. a boiler breakage) which eats into your profits. With property loan notes, however, your returns are more “fixed” since you agree an interest rate at the beginning with the property developer. This brings much more financial stability and predictability for the future.
Of course, you do need to weigh this against the risk of the property developer defaulting. After all, if the project is not completed due to developer insolvency, there is no guarantee you will get your money back. However, you can lower the risks here by looking for property loan notes which are properly backed/secured. This means that if the developer fails for whatever reason, you can recoup your losses from another one of their assets.
Freedom & clear exit
Buy To Let is arguably a good investment for some people, but one disadvantage is that it involves a high degree of management (e.g. overseeing tenants) and ongoing costs such as ground rent, mortgage payments and so on. It also rarely provides a clear exit for your investment, since a Buy To Let mortgage can tie you up for 25+ years.
Property loan notes, however, are much shorter in duration (possibly as little as 1-2 years) and require very little in the way of ongoing management. There are no tenants to deal with, repairs to be made or estate agent fees to manage. There is a clear exit in sight, giving you more flexibility to then turn to other loan note opportunities which may interest you.
These benefits do, however, need to be considered against the risk of late repayment from the property developer, which can be a headache for investors. You may need to wait longer than you expected for your returns, for instance, and chase the developer for an explanation for the delay. At Bure Valley Group, we minimise this risk in at least two ways.
First of all, we vet all of our property loan note opportunities before presenting them to our investor network. This process of review helps to whittle out businesses which are built on an ill-thought-out business plan. Secondly, penalty interest can incentivise property developers to ensure payments and projects are completed on time, and help to compensate investors for any delays they may encounter.
If you are a successful investor and would like to know more about the exclusive property loan note opportunities we offer here at Bure Valley Group, then we’d love to hear from you.
Get in touch today to start a conversation with a member of our friendly team, and to discuss some of the great investment memorandums we have available:
+44 160 334 0827