Property Secured Investments
What are Property Secured Investments?
One of the more attractive aspects of property secured investments is that they enjoy a return rate that averages from 3% up to 6% in most cases. This income is ongoing for the length of time the money is invested, much like an annuity. This means that investors can start seeing returns within the first year of their investment and many funds payout every six months.
You may have heard of property or property secured investments which are a based on a common form of lending. Essentially, this form of secured investment is made by funds and institutions to property ventures which secures the loan or investment through real estate property. The exact type of property can vary from commercial, industrial, or residential.
This type of investment acts as a loan that is secured with collateral which is of considerable value.
Pros & Cons of Property Secured Investments
There are good reasons why this form of investing is attractive for so many investors, particularly those who are just starting out or who are looking for a more secure form of investment.
70% Limitation of Property Secured Investments
For financing purposes, only 70% of the established value of the property is used for calculating the investment needed. This means that there is a 30% cushion which protects investors in case the property itself falls in value for some reason. Plus, it helps secure a return on the investment if the property must be sold.
Establish Value of Property Secured Investments
Only professional evaluators are used to set a value for the property that is subject to the property-backed secured investment. This means that all investments are protected because the evaluators will set the value of the property first before any move is made to use it as collateral. The evaluators are professional, experienced, and not associated with the property owner. The result is a fair judgment on the value of the property. And that the pricing amount will not exceed its sale value.
First Mortgage on Property Secured Investments
Only the first mortgage is accepted on properties in terms of using them for securing loans. This means that if the property must be auctioned off to raise the capital, it will be done by the entity which secured the mortgage itself. In other words, the property does not have additional liens which must be settled if it is to be auctioned off for its value.
Owner-Based Property Secured Investment
In other words, the only properties that are accepted as collateral must be owned by the project. Such properties must be owned and valued to provide proper collateral for the investment that is required. This means that unsecured properties are not part of the property secured investment system. This protects investors from scams or fraud in which the property itself is either not qualified for collateral purposes or does not have nearly the value needed to cover the investment.
Despite all the protections inherent in this form of investing, there is some risk that is associated. To be aware of the risk before you get involved.
Default on a Property Secured Investment
If the project defaults, which means they do not pay back the investment which is made, the property will have to be litigated and then sold to raise the funds. The funds will be used to repay the investors. The process of default can take some time depending on the circumstances, so investors may not see their money back for weeks or even months depending on the circumstances.
Even though the property has been professionally evaluated and only 70% of the value has been used, with some rare cases going up to 80%, it is possible that the property cannot be sold for that amount. This means that if the project defaults and the property reverts to the investors, they may not be able to sell the property for the assessed value.
There are several reasons why this circumstance may occur. The property may have dropped in value because of economic conditions, a change in the neighborhood such as a higher crime rate, or a disaster such as a fire or natural catastrophe which caused damage to the structure.
In addition, if the project is being less than honest, there might be other liens on the property that prevents it from being sold outright in case of default. Also, if there are taxes due that may have to be paid on the property as well.
However, the most common occurrence in which a property might not sell for its assessed value is the auction process itself. If a minimum bid is set, then it is possible that no one will place a bid on the property. And if the minimum bid is lower than the asset value, then it may not reach the 70% threshold needed to repay all investors in full.
Why Choose Property-Secured Investments?
Despite the potential issues associated with this type of investment, it is still one of the more secure available. Having real collateral as opposed to the credit rating and trust of the recipient means that investors will almost certainly get something back under most circumstances. Even if you must wait several months up to a year for the property to be sold.
Property-secured investments have a strong track record of success due to the diligence of those who put the package together. This means that you can invest safely and obtain solid return rates that average 6%, give or take 2% under most circumstances. It is a solid way to increase your portfolio with relatively minimal risk. For those who are looking to expand their investment opportunities, property-secured investments offers a solid option.
Zanthe Alexander Bentley is a Property Secured Investment finance veteran with over 25 years’ wealth management experience advising both family offices and institutions on their corporate finance requirements including capital raises (debt & equity), restructurings and M&A activities. He has significant experience in investment management and investment banking and spent nine years at UBS focused on convertible bond arbitrage and equity derivatives.
Prior to getting involved in Asset Management he expanded a small Spanish brokerage from a handful of staff in Barcelona to a diversified brokerage company with over 150 personnel spread across 9 countries, transacting deals from High Grade to High Yield Fixed Income and Loans; Structured Products through to exchanged traded equities.
After taking time to focus on family office activities in Asia, Zanthe-Alexander now leads an ambitious zero-leveraged fund providing exceptional growth and income to Sophisticated Investors.
Zanthe Alexander Bentley Twitter: https://twitter.com/BentleyZanthe
Property Secured Investments