As investors reach their end goal – usually retirement – there is a very real need to make sure that the portfolio is diversified.
This is achieved by ensuring that exposure to risk is well spread out and not dependent on any one area of the market.
A great way to diversify is to look at different types of investments: houses of multiple occupancy, and property bonds.
Houses of Multiple Occupancy: HMOs
HMOs are dwellings in which the rooms are subdivided between different, individual tenants. Student accommodation is the classic example of an HMO.
HMOs have a communal living space but individual bedrooms fall under separate tenancy agreements. Naturally, they are found in abundance in university towns and cities. A company to look for here is Grant Property, who source townhouses in large student cities. They will renovate the property and add additional bedrooms.
Besides the student market, HMOs for young professionals also exist. Either segment is good, depending on the location (and size of the university town) due to the residual demand.
Property Retail Bonds
A Property Retail Bond allows you to access the property market by investing in a property development. This doesn’t result in you becoming a landlord with a tenant, but you share in the ‘back end’ development – and profits – of property, usually with an attractive financial return.
It works like this: starting at £10,000, a property bond will allow you access the financial growth of a property development over a fixed period of 12-24 months. Bonds will pay in the region of 10% for a term.
Why Developers Offer Bonds
Why do developers offer bonds? Developers, like investors, need capital to carry out new property builds. They have the option of using bank financing for their development, but the bank is likely to charge a high rate for this. This is why they turn to sophisticated investors who buy bonds in their development; it simply costs less for them to raise capital in this way.
By fronting the capital for the project from retail investors, they are able to pay these investors handsome rates of return (and in today’s investment landscape, 10% is a respectable rate of return) while still paying less in financing costs to the big banks.
While bonds are only suited to sophisticated investors or High Net Worth individuals, there are a number of built-in safety mechanisms which protect investors in the event of financial insolvency on the part of the developer.
Firstly, funds invested are held in what’s known as a SPV – Special Purchase Vehicle. This is a legal structure which means that if the developer becomes bankrupt, investors will have first legal charge over the assets, meaning they are the first to be reimbursed.
On top of this, there is a Third Party legal team set up to manage the bond and its assets and this will enable investors to be paid first.
While these are legal safeguards, the nature of these bond is that they are unsuitable for unsophisticated investors, and the FCA requires that providers offer them only to those who fit certain criteria. The definition of High Net Worth, for instance, means that investors will hold at least £200,000 in assets. Clients with a couple of rental properties will already fit into this category.
However, all this does require the expertise of a good investment team to manage.