Safe as houses!
Investing in real estate, alongside bonds, cash and shares, is recognised as an effective way to diversify an investment portfolio and it can provide a steady, life-long income. This month we discuss different ways you can invest in property including some secure alternatives that you may not have considered before.
Direct Property Investment
However, returns are not always what they seem – so you should look closely at risk reward. Here are some examples:
Your savings in the bank are often used to lend on property indirectly (as banks lending to people and businesses often secure debt on property, with other debt unsecured) the disadvantage is relatively low returns, the advantage is that banks are regulated and for small investors there are compensation schemes if a bank were to go bust. The compensation schemes won’t necessarily guarantee all of your capital.
Since the financial crisis a number of new lenders have emerged, some are referred to as Peer to Peer Lenders, where one person lends another money sometimes secured against property – these opportunities come in all shapes and sizes and crucially not all carry the same level of risk or return. Typically where higher returns are promised there is also a much higher level of risk to your capital, either because of the underlying quality of loans (which may be unsecured), type of property used for security or the profile of the borrower.
Another way to invest in debt is through a fund structure. This is likely to have a significant advantage over Peer to Peer lending because a fund should offer diversification alongside other benefits of investing in debt and reduce some of the risks
Here are some of the areas to consider if you are investing in debt:
Development loans - lending to property developers, who often start with demolition of an existing property before building something new and seeking new buyers, can be much riskier than lending against finished property.
Property types used as security - Lending against a retail shop premises may be higher risk than lending against a residential property particularly with a shift to online shopping and economic uncertainty.
Higher loan to property value lending - for example lending 75% of a property value will be much riskier than lending 50% of the property value.
RAW Capital Partners has a debt fund that only invests in residential property loans, secured on residential property in the UK and Channel Islands and averaging less than 50% of the property’s valuation. It provides a very consistent return to investors. Our expert team use a robust credit process and specialise in identifying quality, low risk lending opportunities. The RAW Mortgage Fund launched over four years ago and investor capital is now spread over more than 180 loans secured on different properties. Shareholders and directors of RAW Capital Partners are significant investors in the Fund, so every time we lend a pound, our capital is at risk alongside investors and our interests are aligned. Learn more here.