Debt; the safest property investment

Googling ‘People Investment’ returns a plethora of adverts and links offering anything from investing in residential BTL’s, student housing, car parks, property funds, off plan exclusive member only deals, no money down deals to how to be a property millionaire in 10 minutes but the bottom line is these investments are all EQUITY investments.

 What does that really mean?

1. It means that you are investing in exposure to a currently unknown potential profit or loss of a property transaction or fund
2. The majority of property is purchased using a combination of equity and debt (mortgage)
3. This is known as leverage and can increase the investment returns on equity
4. BUT Equity takes the first losses if the value of the property falls
5. Therefore the value of the equity can rise and fall on an almost daily basis as market sentiment dictates

Investors think of different types of property investing by residential, commercial, investment, development and then across all the different property asset classes but at the end of the day they are all EQUITY investments.

There is another type of property investment, which is a long established asset class and up till now has been the exclusive domain of large institutional investors and banks. It was established to provide these investors reliable and stable income with high levels of capital protection – it’s a fixed income or DEBT investment and it’s one of the safest property investments that you can make.

Rather than investing in the equity part of the property transaction, you can invest into the debt (or mortgage) part of the transaction.

1. Debt Investors sit lower down the capital structure and rather than ‘owning’ the property, are protected by way of a 1st legal charge over the property
2. This legal charge is registered with the Land Registry and potentially Companies House
3. Debt investors are protected from the day to day property value fluctuations by the equity cushion
4. Unlike equity investors, Debt investors invest on the back of known invstment returns
5. Returns are by way of fixed rates of annual interest rather than the potential of capital gain or loss
6. Debt investors are first in line to be repaid when the property is re-financed or sold
7. The equity investor may need the debt investors permission prior to making changes to the property or the tenants
8. If the equity investor stops making the interest payments, via the security documents, the debt investor can take control of the property and sell it in order to redeem the outstanding debt

While debt investors may not earn the higher returns that equity investors ‘should’ earn, their investment is one of the safest property investments. This is equally true no matter if the property is residential, commercial, investment or development.

Remember, Debt is first in line to be repaid when the property is sold or refinanced.

Brian Bartaby is the Founder & CEO of Proplend , a P2P Platform specialising in sub ￡5m commercial property debt. Matching borrowers demand for loans with investors demand for income. The views above are my own and not a representation of Proplend or any other platform. Investors' capital is at risk.