Understandably, financing a property development project is a big venture. Large residential buildings and projects can often cost a significant amount of money and it’s vital that funding is secured to get the project started. But, where does the funding come from? What’s involved in financing a property development deal and is it hard to secure this funding? If you’re new to the industry, or you’re looking for more in-depth information about financing a property development deal we have everything you need. Read on to find out what’s involved.
Is it easy to receive a loan to finance a property development deal?
Understanding how you are gong to finance your building project is going to be a key aspect of your planning stage. Before you commence any development project, it is obviously crucial to first establish how much you can borrow and how you will be able to manage all associated costs of the development. Any good property developer will have to understand financing options. It is also imperative that they know what the banks look for when they are considering lending to development projects.
Many lenders are looking to minimise risk as much as possible and will be focusing on looking after their own safety first. So, before deciding whether to finance your project, banks and financial institutions will assess your overall risk, taking into consideration everything from you as an individual and your ability to repay the loan, to the viability of the development itself.
In other words, banks don’t simply lend based on the security of the project; they also want to establish the track record of the people behind the development. Developing a solid reputation with the bank and a sound track record in property development, will help immensely as you will show them that you are a sound risk and you have a track record of repaying your loans. Lenders will also assess your development team as well as the professionalism of your finance presentation to them.
Together, this means that it is important to submit your loan request in a professional manner, including a detailed feasibility study to show that you have accounted for all contingencies and you have the ability to repay the loan in a number of different circumstances. Generally, a development loan will be structured so the lender provides up to 70 to 80 per cent of the final cost of the project, rather than its end value. They will expect that you as the developer, or your equity partners, will be able to provide the remaining balance of the cost of the project.
How long does it take to secure property development financing?
First, you need to decide which finance property development route is most suited to your situation. You’ll work out how much you require to make the complete the property. This will have to match up to the amount you can borrow, which is likely to be determined by:
- The current house value (drawn from a valuation report about the property and current market)
- The cost of your proposed development (is this a light renovation project, heavy refurbishment, or a ground-up development?)
- The expected value of your property once all development has been completed
The amount that financial lenders will offer is dependant on a variety of factors. They can choose to offer you 70-80% of the costs or they may only offer a small percentage. Banks will assess applications and approvals on a case-by-case basis.
It’s also important to remember that taking out a loan can be expensive. There are a lot of extra costs as that need to be accounted for when borrowing money. Your loans will accrue interest rates and other fees depending on the amount borrowed and the term of the loan. Depending on how you finance your development, you’ll either be expected to pay back the loan in full after selling the newly developed property or in smaller increments over a set period.
How do property developers raise finance?
There are a number of different property financing options available to developers. The most common include:
Cash is one of the easiest and quickest ways to finance property development. Without the need to rely on loans, property developers using cash can forego interest and keep the development as cheap as possible. If you can afford to use cash, it should always be your priority when sourcing financing for you project as you are going to save plenty of money in the long run.
A Buy-to-Let mortgage is for developers or people looking to buy or build a property that they plan to rent out, rather than live in it. Most Buy-to-Let mortgages are set as interest only. This means that the monthly repayments will only pay off the interest, not the amount owed on the mortgage. These types of loans are perfect for anyone looking to build or buy a property with the intention of having others live there, with the interest-only aspect making it a much more attainable option for many.
A bridging loan, or bridging finance, is a short-term loan that can help you finance the purchase of a new property while you sell your current property. A bridging loan works by giving you the money to proceed with a purchase while you free up money from other assets/investments or secure a long-term finance plan. A bridging loan covers you until your property is sold, and you have the funds to pay back the amount. For developers who are aiming to make their money back fast, this is often a great short term option.
Specialised property loans
If you don’t want to take the traditional route, you might be eligible to receive funding from a private source that offers specialised property development loans. Companies and brokers that focus on raising finance for commercial or residential developments have become common and it is often easy to find experts who can assist you with your financing venture. Specialised property loans are usually handled privately but are still subject to regulations from the financial conduct authority.
Otherwise known as unsecured loans, a personal loan delivers a one-time payment of cash to the borrowers. This payment can be large enough to cover the costs of residential development. The borrowers will then have to pay back the amount plus interest in regular instalments over the lifetime of the loan. Depending on your borrower, repayments can fixed or flexible and you’re typically eligible to pay back the loan in full before the end of term, if you are able to.
Have a chat with our team today
If you are looking for further information regarding financing options, get in touch with our team of experts today. With over 20 years of experience in the construction industry, we have all the information and expertise you could possibly need. If you’re ready to move forward with your building project, we’re the experts you want on your side.