What are Property Investment Bonds?

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What are Property Investment Bonds?

For new and experienced investors, property investment bonds have become more renowned over the past few years after investors began to see a greater return on their investment compared to the average investment bond.

As an investor, diversifying your portfolio is key when trying to create a balanced and ever-growing asset allocation, but we’re going to talk you through exactly what property investment bonds are, how they can be used, and whether they can benefit you in the long run.

If you’re on a path to financial security, carry on reading as we run through the ins and outs and break down everything for you to make your own investment decisions.

 

Property Investment Bonds Explained

A property investment bond (referred to as a property bond too) is a type of loan secured between an investor and a property company/developer to raise finance for their project. As an investor, this means if you see potential in a property company or a type of property development, you can help fund this project and expect returns over time.

As the stock and share markets can be volatile, this allows investors who are less risk averse but are also intrigued to invest in property to help fund a project while being passionate about what they’re putting money into.

Typically, the investor and property company or developer will legally agree via a contract that states that the investor’s capital will be used towards the property project they’re working on. Throughout this contract, it will have to show you exactly what your money is going towards, how it is being used for the property, and the returns you’re expected to receive from the rate of interest.

You’re seeing this more and more because the bond that you can invest in is backed by assets and will be protected by one or more properties. Also, these bonds are secured by a lien (an official order that allows someone to keep the property of a person who owes them money until the money has been paid back) on land or property, providing an extra safety net for your funds.

 

How Do Property Investment Bonds Work?

Regardless of what the property company or developer is trying to use the property for, whether that be construction, renovation, or any other real estate venture, they can begin a property fund whenever they want to help raise funds for their vision.

As for the investor, the contract that you agreed upon with the property company/developer will change. However, it is often the case that the bond is issued between two and five years, and you’ll agree whether your interest will be paid monthly, quarterly, or yearly.

This can change depending on what you want, what your property developer or company is demanding, and ultimately what you agree upon – thus, the timeliness of your interest payments can differ from company to company. Yet, at the end of your agreement, once the bond has matured, the loan that you originally invested in will be paid back in full.

 

Are Property Bonds Safe?

Whether property investment products are safe or not depends on a multitude of factors, such as: whether the company/developers you’re investing in are credible, the history of their performance is on an upward trajectory long-term, and the terms they offer within their contract.

However, if they abide by and agree to a contract that you’re happy with and have all the credentials to back it up, this can be a safe investment for all parties involved. Property bonds are asset-backed, meaning that you, as the investor, can secure collateral through first or second legal charges, which are registered at the Land Registry Office.

Overall, there is always a risk that you will lose money with an investment, but if you take the utmost care and responsibility during research, choose the right project, and make sure every detail is covered for yourself, this investment can be an extremely safe option to earn great interest over time.

 

The Benefits and Drawbacks of Property Investment Bonds

Like any investment you can make, there are always benefits and drawbacks to what could happen to your capital, and we’re going to show you the upsides and downsides of property bonds below:

 

Benefits

  • If secured, there will be much less volatility daily compared to stocks and shares
  • Your contract allows you to be flexible when you receive your interest payments
  • If you choose the right company/developer, you will have asset-backed security
  • Another option for investors to use in order to diversify their portfolio
  • Potentially higher returns are available compared to conventional investments
  • You can have potential tax-free earnings if backed by the Innovative Finance ISA (IFISA), Self-Invested Personal Pension (SIPP) or Small Self-Administered Scheme (SSAS).

 

Drawbacks

  • You can’t get your entire initial investment back until the fixed-term contract is completed (2-5 years, typically)
  • You have to do your due diligence and research before investing in a property company or developer
  • There are so many property investment bonds, so you have to be careful about investing in a trustworthy company
  • Potential changes in the property market, location of your property, or financial stability of the issuer may be hindered

 

Other Property Investment Bond FAQs

We have given you an outline of what investment property bonds are, how they work, and what the upsides and downsides are for you, but there are a few commonly asked questions we receive about them, which we’ll answer here:

 

What is meant by a charge on a property?

A charge on a property is essentially a safety blanket for investors, giving them a guarantee within their contract that they will receive their initial investment back. This is regardless of whether the company or developer you work with succeeds or fails in their project.

 

What is the interest rate on property bonds?

On average, the interest rate on property bonds is between 4-15% returns, with a reasonable number of returns being around 8% if we’re being cautious. For most investors, if you’re investing long-term, around 8% can compound extremely well and generate incredible amounts of wealth over time.

 

How can I invest in property investment bonds?

In regards to how you can invest in property bonds, you can either do this by reaching out to the property company/developer directly and agreeing to the terms of a contract with them, or the safer way is to purchase them through a lender or intermediary: a specialist within this field of work.

Are you searching for investments which outperform bank interest rates?​

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