Combining financial security and lucrative returns is a difficult investment mix to find in any market. Investors want and demand a lot, and rightly so. They want solid returns, principal protection, control over when they can access their money and, most importantly, they want to sleep soundly at night free from anxiety. For the investor with those demands, home build bonds could be the best option.
“HomeBuild Bonds are directly secured against the property and overseen by a trust company, which is very different from a limited partnership or syndicated mortgage,” says George Lawton, CPA, CA, CEO, North American Home Finance Inc. “They also enable investors to avoid market timing and provide predictable results: investors get a specific forecast of profit rather than just a speculation.”
When an investor buys shares in a limited partnership or syndicated mortgage, they are ultimately putting their faith in the management company to complete the project and provide a return. If something goes wrong, it’s the investor who is left out of pocket. “It’s different with bonds because the trust company can control the title of that property for those bond holders,” Lawton says. “You’re not relying on management to see the project through to its end result.”
A real estate bond’s profit margin and returns are built in based on the current value of the real estate. Even if the market does go down during the investment period, the built in profit margin covers the return of capital to the bond holder.
HomeBuild Bonds are also short-term in nature. Obtaining all of the zoning and approvals documentation can take time, so the bond does not invest until all of those milestones are met. The investment is made when construction is ready to begin. “Also, the company sponsoring the bonds must have its own funds invested in the project,” Lawton says. “All bond holders get paid out their entire principal return plus their minimum return before the company’s capital is paid back. Therefore, the company is really motivated to make sure the project goes well.”
The most important factor of HomeBuild Bonds is the fact that the investors’ capital is protected by a surety company’s guarantee during construction. This means all development risk is eliminated and an investor can have peace of mind knowing that the development will be completed or they will get their money back plus their minimum priority return.
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