Property Investment Bonds vs Buy-to-let: Where Are the Better Returns?

Property Investment Bonds vs Buy-to-let: Where Are the Better Returns?

updated October 21, 2019

It goes without saying that one of the key objectives of investors is to maximise their investment returns. Traditionally, owning property has been a favoured option, given the dual prospects of rental returns and capital appreciation.

Yet smart investors are always looking for different ways to enhance their returns. In recent years, property bonds have become one of the most favoured investment options as an alternative to direct investment into property.

Generally offering better returns and taking away the headaches of sole property ownership, property investment bonds usually outperform other property-related investments. In fact, recently published research indicates that investors could have received almost twice as much by investing in property bonds, when compared to buy-to-let properties, over the same time period.

The Nao Group

The Nao Group is a commercial property developer with a long history of development projects in London. It has years of experience and an unrivalled track record of delivering returns to investors as agreed and on time. The Group is, therefore, able to offer attractive investment opportunities to invest in commercial property investment bonds to institutional and retail investors at interest rates of 8.25% per annum.

What are property investment bonds?

Property investment bonds are a great alternative to investing directly into property. Such bonds offer the opportunity to earn passive income and enjoy the rewards of a property developers’ hard work, without having to be concerned about the stresses involved with developing or managing property

What is meant by buy-to-let?

Buy-to-let” is a phrase used in the London and UK property markets referring to the purchase of a property specifically to let or rent out. This is typically a residential property but it may also be a commercial one. It is usually possible for investors to obtain a “buy-to-let mortgage” which is a loan specifically designed for the acquisition of such buy-to-let properties.

This type of property investment was, perhaps, more popular some 25-30 years ago when the interest rates on mortgages for buy-to-let properties were relatively low and home prices were rising. The combination of rental returns and capital appreciation were attractive to many investors.

But times have changed, and more attractive opportunities, such as investment in property bonds, have come to the fore.

Key benefits of investing in property bonds

As a starter, let’s take a look at some of the key benefits of investing in property bonds: 

Benefits of Investing in Bonds Infographic

1. A stress-free investment

Putting together an investment portfolio can be quite stressful at times. However, property investment bonds are one of the best and most affordable ways to capitalise on someone else’s efforts, property experience and knowledge.

2. Attractive interest rates

Property bonds offer two types of interest rates: fixed interest rates and variable interest rates. A fixed interest rate means an investor will receive the same amount of interest throughout the bond period, regardless of what happens to interest rates nationally.

A variable interest rate means that the interest received each year depends on the interest rates offered by banks.

3. Asset-backed investment 

Some property bonds, such as the Nao Group bond, are asset-backed providing an extra level of security for investors.

4. Early exit option

A number of property investment bonds include an “early exit” clause. This means that a contract for a bond can be terminated at any time, subject to certain conditions being met.

Advantages of property bonds over buy-to-let

Let’s now look at some of the key advantages of investing in property investment bonds compared with acquiring buy-to-let properties:

Property investment bonds:

  • can be asset-backed, which means that there are always underlying assets to generate the returns required by investors;
  • enable investors to start to invest with relatively low capital amounts. There is no need to get a mortgage or loan or save up to get enough to pay a deposit on a property;
  • ensure that the costs and risks of property ownership are spread between the parties investing in the bond. Collective experience and insights, together with shared liabilities, help to mitigate risk substantially;
  • enable individual investors to benefit from the profitability associated with the property sector, without all the downsides of direct property ownership;
  • generate some of the most attractive returns currently available;
  • are usually only established by developers with a proven track record of success;
  • offer a clear and straightforward investment subscription process, as well as different options in respect of the amount to be invested.

On the other hand:

Buy-to-let properties:                 

  • have recently been subject to tax, legislative and regulatory changes which have restricted the attraction of such properties as an asset class;
  • are also being affected by the lack of availability of the mortgages which support such types of investment. Many lenders have withdrawn or reduced their exposure to this market segment. It is reported that, in the UK, the number of buy-to-let landlords has fallen by an estimated 120,000 over the last three years;
  • leave all of the risks and costs of property ownership with a single owner instead of it being spread out between all co-investors, as with property investment bonds;
  • often leave the property owner facing hassles with tenants in respect of repairs, late payment of rent, lease terms and conditions and so on.

Comparison of analysis of typical investment returns

If we look at the typical investment returns between investing in a property bond and acquiring a buy-to-let property, the difference in returns is quite stark.

Investors in a property bond such as Nao Group’s bond can enjoy:

  • a fixed interest rate of up to 25% per annum;
  • a fixed bond maturity period;
  • a bond is which is asset-backed with development assets

As an example, an investor investing £50,000 in a 5-year bond will receive £4,125 interest per year. As the interest rate is fixed, the interest paid for five years will be constant.

Upon maturity of the bond, the bond issuer will also return initial investment of £50,000.

On the other hand, let’s say a buy-to-let property was acquired for £300,000 and rents for £1,250 per month £15,000 per annum (gross), and assume the property remains 100% occupied. This return is before any repairs or maintenance items, insurances, managing agent’s or letting fees and/or loan repayments have been taken into account.

This gross return of 5% per annum may easily become 4% or less before any mortgage repayments are factored in.

Compared with a hassle-free investment yielding 8.25% per annum or approximately 41.25% over a typical five-year life of a property bond, this circa 4% (before mortgage repayments) for a buy-to-let property pales in comparison.

Conclusion

Clearly, investing in property investment bonds comfortably outperforms an investment in buy-to-let properties.

Property investment bonds offer an opportunity to avoid maintenance fees, stamp duty, council tax, insurance payments, tenancy issues, as well as mundane issues such as dealing with background checks on tenants.

Such bonds leave the investor free to be able to invest in the UK property market without development or property management related hassles. This is just one primary reason that this alternative investment sector has experienced exponential growth, as more investors become aware of the potential for greater returns from property bonds.

Do you need more information about investing in bonds? Contact us today or download our prospectus document.

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