Could developer loan notes enhance your portfolio returns?
Developer loan notes are becoming increasingly popular with investors. Essentially, this is because the investor gets to act like a bank: lending the developer money in return for interest payments – and we all know how much banks make when they lend money.
However, it is not only the interest that makes developer loan notes attractive as investment vehicles. In this article, you’ll learn about the seven major benefits of investing in property developer loan notes.
Benefit #1: Income and profitability
Developer loan notes offer investors a great rate of return to the investor. Because you are lending the developer the funds to get a development off the ground or through subsequent stages of development, you’ll find that you benefit from a higher income level than from most other comparable types of investment.
Without your investment, the developer may not be able to progress with building on a site, or its plans could be delayed as it waits for other financings to be arranged. Either way, your investment moves the developer toward its goals and profits faster – and this results in a premium on your return.
Typically, the interest you would receive ranges between 8% and 15% in the first year, and with possible bonuses added in subsequent years, the percentage can extend far above this.
Benefit #2: Ideal for shorter-term investors
Developer loan notes have maturity dates, on which you will be repaid the capital that you effectively loaned to the developer. The developer does not want to continue paying premium rates of interest for any longer than needed – doing so eats into its forecast development profits.
Therefore, the developer will issue loan notes for the capital it needs, and it is in its favour for it to lend for as short a time as is necessary. The quicker it completes a development, the less it will pay in interest and the greater its profits will be.
Typical timeframes for investment are 12 months to five years, though these can be shorter and longer. This is ideal for those investors who do not want longer-term investment, or who have plans for their capital at a certain date in the future. For example, if you have school fees, an interest-free
loan repayment, or perhaps a mortgage to pay off, in a few years, a developer loan note could provide exceptional returns to meet your objectives.
Some loan notes come with the provision that the developer could repay the loan earlier than maturity date – meaning you get the pay-off sooner than anticipated.
Benefit #3: Flexibility
Many developer loan notes are offered with built-in flexibility. If you need your capital sooner than the maturity date, the loan note may allow you to withdraw earlier. To do this, you may need to give notice (of, say, 30 days) and withdraw your investment on an anniversary of your original investment.
You might also invest in loan notes that pay interest on different payment cycles – for example, quarterly, half-yearly and annually. This allows you to structure your income for when you need it.
Benefit #4: Passive income with little management needed
It is easier to manage several loan notes than several properties. A computer and phone are all you need. Plus, once you have invested, there is little management to do – other than check that your income is flowing when it should.
There is no dealing with tenants, and no unexpected maintenance bills to pay. Tax liability is easily calculated.
Provided you have done your research first and invested in loan notes offered by experienced and financially secure developers, then this could be the ultimate passive investment.
Benefit #5: Collateral
Developer loan notes are tied to specific developments, meaning you benefit from identified and named collateral as security. As the development matures, this collateral increases in value. Effectively, the risk you take decreases as the developer builds. With your investment tied to real property, you have tangible security backing your investment.
Benefit #6: Diversity
Investing in loan notes helps you diversify your investment portfolio. You get to profit from the efforts, experience and business of the property developer. You get to profit in a similar way to how banks and other lenders profit.
Benefit #7: Investment minimum is smaller
The last of the major benefits of investing in loan notes is that the minimum investment amount is much smaller than when investing directly in property. Some developer loan notes allow an investment from £5,000. This means that it is much easier to spread risk between developers, and also that the financial barrier to entry is lower.
When investing in developer loan notes, investors are rewarded for providing finance to developers. With a lower investment amount, it is easier to diversify your portfolio across several developer loan notes as well as benefit from diversifying your investment portfolio by using different types of investment asset.
Developer loan notes are ideal for investors who have a shorter timeframe and also desire the flexibility for early access to their capital. They are flexible in their nature, and a loan note portfolio can be constructed to help you benefit from different income payment dates and maturities.
To learn more about the benefits of investing in developer loan notes and how they may enhance your investment portfolio returns, contact one of the team at Gladfish at +442079236100“>+44 (0) 207 923 6100. We’re looking forward to speaking to you, and think you’ll be as excited about the loan note market as we are.
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Financial Promotion Disclaimer and Notice
Before we can discuss any investment opportunities all potential investors in this type of opportunity must certify themselves as either High Net Worth, Sophisticated Investors or Ordinary Investors.