How High Net Worth Individuals Invest in Short-Term Finance
For high-net-worth individuals wanting to get involved with the short-term financing of property projects, there is a lot of money to be made. But, it is a business filled with risk and you need to make sure you understand the issues, do your due diligence and put together a good team of valuers and legal experts.
Amy: I want to ask you now, Rory, if we had high-net-worth individuals (HNWI) who are watching these videos now and they wanted to invest, directly, in short-term finance, so, they want to lend money out, is there a way that they can get involved with that?
Rory: Okay, so, that's essentially what I did in 2005, 2006. We did some research, did a bit of property training, found there were very few bridging companies around.
It's a full-time job and the key thing is, it's about risk. So, you could set your own business up. It is incredibly risky. You have to do your due diligence, you need to have access to good valuers, a really good legal team, the ability to underwrite and understand where problems can be, in lending money and also have access to people like a QS or quantity surveyor.
That's one way, do it yourself. But, essentially, it's a job.
The other way, you could just lend via some form of crowdfunding facility. So, like a peer-to-peer platform. And that can be done for debt and also equity.
And I'd say, 'Go Google it, go do some research'. You haven't got to do all the hard work, you just get the return and that way you have freed up your time and you're getting essentially passive income.
So, that would be another way of doing that.
And how we operate, we keep it very simple. We have projects that need funding so, either we will lend that lend the money ourselves or we might broker.
We have just done a £2mil loan for a client for a big office-to-resi conversion. We brokered that, it was very, very simple.
But when we are borrowing, we don't do profit-share, we just do straightforward loans. Fred has a £100k that's there. We would agree on a rate that we would pay Fred. So, that could be 6% or 7%. It just depends on what project, really. And, we then have the first charge on that.
What we are not doing is offering really crazy rates. The reason why the rates are normally higher is that the money - I don't mean a profit-share, just on the loan. It's probably because the money that's been borrowed from the investor and used in that project, is probably the mezzanine finance, ie there is a charge with a lender and then it's the money on top.
So, you have to understand that that is risky. It is incredibly risky because if it goes wrong, the person who has the first charge gets fed first.
If you are in that pot of those on mezzanine or second charge, then you have to wait...
Amy: You have to wait your turn.
Rory: Yeah, so that's the thing. So, essentially higher rates are higher risk and again, you need to be aware of it.
Amy: Thank you.