Debt, the Safest Property Investment

I am seeing more and more through my LinkedIn feed, adverts for financial products such as CFD’s accompanied by numerous risk warnings, one of which is “you may lose an amount greater than your original investment”.

Wow, that is scary and a big risk!

The reason this loss could occur is that the investor has used something called ‘leverage’.

This alone would cause the majority of investors to steer well clear but surprisingly those same investors would be perfectly happy to purchase a property using a mortgage.

What, I hear you cry, how can they possibly be the same?

Let us think this through.

If a property costs ￡100,000 and an investor puts up ￡25,000 equity and takes out a ￡75,000 mortgage, he is able to purchase the property.

The property can fall in value by up to ￡25,000, at this point the investor would see his original equity investment wiped out.

If the property carried on falling by say another ￡10,000 and the investor was unable to redeem the outstanding mortgage, then the lender would look to the borrower personally or through a personal guarantee, if purchased in a SPV, to make up the shortfall.

The outcome of which is, that it is possible for a property investor to lose more than their initial investment!

It has happened to property investors in several property down turns, so why don’t property investments carry the same risk warnings?

There is form of property investing with much lower risk and zero chance to lose more than you have invested. It's called Property Debt.

Property investors purchase property with the expectation of benefiting from regular income and or capital gains.

Notwithstanding the above risk, mortgages are a long established investment tool used day in and day out, by both individual and institutional property investors, to minimise their equity per property and to (hopefully) increase their equity investment returns.

There is circa ￡164 billion of outstanding commercial real estate debt (CASS Jul 2018) and ￡1.37 trillion (CML Feb 2018) of residential real estate debt in the UK, of which 16.7% is buy to let loans. This is not only a huge market but we are positively encouraged to take out commercial and residential mortgages by numerous banks, building societies and financial institutions.

So if property investors are looking for rental income and capital gains, what are the banks, building societies and financial institutions who provide the mortgages expecting?

 Property Debt is a long established asset class, created for institutional type investors looking for stable and regular income supported by high level of capital protection.

The income comes from the monthly interest payments and capital protection comes from the security of the underlying property. Debt investors are protected by an equity cushion, this cushion soaks up day to day market noise and movement. Should the value of the property fall, then the property investor takes the first loss and when the property is refinanced or sold, the debt provider is first in line to be repaid.

Debt is often described as the safest property investment. 

Whilst there is still a risk of capital loss, there is no risk that an investor could lose more that their initial investment. 

Until recently, investing into real estate debt has been the privilege of institutional investors, but with the creation of alternative finance platforms or peer to peer lending platforms, this asset class has opened up to individual investors. Via online technology platforms individual Investors can now access this market and can lend across various property asset classes both residential, buy to let and commercial investment.

Investors can either pick and choose loans themselves or most platforms operate some sort of an AutoLend product and as with all investments investors should look to spread your risk and create a diversified loan portfolio.

Proplend enables lenders to invest directly into commercial property backed loans, we match lender demand for income with borrower demand for loans.

Not only do we split loans into bite sized pieces but are the only platform to follow institutional methodology of splitting loans in up to several loan to value based risk bands or tranches. Investments start with as little as a ￡1,000 using the Classic cash account or be made via an ISA wrapper or a SIPP or SSAS account, producing tax free returns.

If you are looking for attractive rates of property backed fixed income returns, rather than having to deal with sourcing, purchasing and managing a property – try investing into property debt via an online technology platform.

To repurpose Shakespeare’s famous Hamlet quote, “either a Borrower or Lender be”.

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.