What are the Potential Benefits of Adding Loan Notes to my Portfolio?

Our loan note products have proven to be an incredibly popular offering amongst our members. In July 2017, we successfully exited our first matured loan note, repaying investors their initial investments in addition to 8% interest. We have since redeemed two further loan-notes, with returns being paid on time and matching expectations.

Darren Schindler, Chairman of Property Moose noted, “We believe the success of this product is rooted in its simplicity. The lending opportunities hold a legal charge, and are secured by carefully sourced property assets. Our members recognise the opportunity to earn hassle-free, fixed returns, alongside the security of bricks and mortar. It’s a simple, tried and tested model.”

Shortly after, the success was featured in Alt Fi, and Times Realty News wrote a piece titled, “Why Loan Notes are Gaining Popularity Amongst Property Moose Members.”

Considering the product has proven to be so popular, we decided to look at some of the potential benefits of adding loan notes to your investment portfolio.

Greater diversification

Coined by Harry Markowitz in 1952, the term “diversification” is widely regarded as a long term investment strategy that has the ability to reduce risk and increase returns. Prior to Markowitz’s Modern Portfolio Theory, investors were likely to disregard the collective nature of their portfolios, simply chasing high-yielding stocks. Markowitz discovered that by choosing investments that do not move in lock-step together, potential losses in one part of the portfolio can be compensated for by the gains in another.

While the success of buy-to-let investments may be dependent on tenancy rates and localised capital growth, loan notes listed on our platform are fixed term agreements, legally secured against either cash or property, meaning the assets could be sold in order to repay the loan. By introducing secured loans into your portfolio, you’re essentially introducing a different type of investment class, which you can monitor, control and view on the same dashboard as your other investments.

“I like the direct investment in buy to let, but I also like the idea of having a variety of investment classes. So, the loan note seemed like a good way to diversify a bit more. I saw it as part of my Property Moose holdings in which I could invest a lot more because I wasn’t as worried about the risk of any individual property – and the 8% return certainly helped!”

- Joshua, a 24-year-old Property Moose member who has invested in our loan note product. Read his full interview here.

Exposure to property development opportunities

By investing in our secured loan note opportunities, you could be exposing your money to the world of property development - a sector which requires extensive expertise and capital to enter. Unless you’re sitting on a sum of cash, you could find yourself locked out of the market. Likewise, property development projects require hands on management. From organising a team of building contractors to running the day to day logistics, projects can be a mountain of hassle, especially if you lack the experience.

Our loan notes can allow you to expose your money to property development opportunities in a far more hassle-free way, with your potential returns being almost entirely passive. Your money could be used to support the increase in GDV (Gross Development Value) of a property, and creatively build value from the ground up, without you having to lift a finger.

“I liked the idea of diversifying my portfolio with a mixture of products. Other appeals included the fixed return, the decent interest rate in exchange for a minimal risk and the ability to help the platform offer more properties.”

- Ian, a 41-year-old Property Moose member who has invested in our loan note product. Read his full interview here.

A shortened time frame

Property is often considered to be a long-term investment. With the exception of fix and flip projects, investors may wish to hold on to their properties for years before cashing in on potential capital gains. Likewise, in offering the potential for consistent monthly income, buy-to-let investors may choose to hold their portfolios for as long as possible.

On our platform, term lengths on buy-to-let properties can last up to 3 years, and be extended should the Crowd vote for a longer hold period. While this reflects the nature of property as a long-term investment, you may wish to make your money work for a shorter time frame without compromising on yield. And while the secondary market can allow you to list your shares for sale prior to the end of an investment term, your early exit is dependent on finding a willing buyer, and you may need to lower your sales price to incentivize a quick sale.

Though this varies between opportunities, the term length of loan notes tends to range from 6-18 months, with potential returns being 7-12% p.a., offering a much lower commitment in time, without necessarily compromising on earnings.

Fixed returns

With our loan note product, you will know the fixed return you can expect to receive at the end of the term. While buy to let investments project rental income and forecast capital growth, forecasts are not a reliable indicator of future performance, and real earnings may differ from projections, subject to market conditions. Variables such as tenancy rates and changes in the housing market may influence the actual returns you receive.

While the term “fixed return” does not equate to a “guaranteed return,” your money is legally secured against cash or property. This means that, in the unlikely instance of the borrower being unable to repay the loan (plus the fixed interest), the assets can be sold, allowing lenders to be repaid. The order of this, however, will be dependent on the type of legal charge in place (first or second).

For example, in the instance where money raised in a loan note is being used to finance a property development alongside a mainstream lender, funds raised may hold second legal charge, meaning that the mainstream lender will be repaid first, and the second charge holder will be repaid second. As long as the LTV (Loan to Value) leaves enough headroom for investors, then fixed returns should not be affected. For example, if a loan note holds an LTV of 95%, a property’s value would only need to fall by 5% for a lender’s capital (and fixed return) to be at risk. The lower the LTV, the larger the headroom and the lower the risk.

Under this logic, loan notes which hold first legal charge could prove to be more popular with investors who consider themselves to be risk-averse, because they will be first in line to be paid any subsequent returns, even if the property’s value has fallen. Alternatively, loan notes which hold second legal charge could prove to be more popular amongst investors who are happy to take on a bit of risk in pursuit of higher returns, as second charge loans generally tend to pay higher interest rates to compensate for the risk involved.

Current loan note investments can be viewed here.

By Jenna Kamal

Capital at risk