Raising finance for a property development can sometimes be a complicated affair. Not everyone has the means readily available to them. But fortunately, there are multiple options available. How to finance a property development can be done in a number of different ways.
As an investor, you may qualify for a variety of loans or mortgage options. However, establishing a strategy is essential due to the industry’s complexity.
Let’s find out a little more about how to finance a property development.
How To Finance A Property Development
Property Development Finance In A Nutshell
Financing is frequently used by homebuyers to undertake repairs or by property investors to build new developments. This can happen in a variety of ways, but it usually requires the party to take out a high-interest loan in the short term.
Financing for property developments is used for building projects like loft conversions, extensions, and new builds. As an alternative, it can also be applied to protect a piece of land. Some sources of development financing are limited to supporting residential properties solely; which means, in these instances, that buildings for offices, storage, and other requirements are therefore unlikely to be eligible.
There are numerous sources of development financing, and with that, there come many different eligibility requirements. While some lenders are more concerned with your personal circumstances and credit score, others will be more interested in your company strategy.
Before applying for a property development loan, it’s important to think about your eligibility. You may be better suited to one source than another. The approach taken by lenders varies since they all evaluate variables such as the project’s length, build type, valuations, developer history, borrower circumstances, and security in different ways.
Getting started doesn’t have to be all that difficult. The following are some of the most important aspects of property finance:
Minimum Loan Amounts
Finance can start from as low as £50,000, although larger lenders like the high street banks are known to only consider funding for projects with higher values.
Gross Development Value
The gross development value (GDV), often known as the end value, is a valuation indicator that is calculated to provide a ballpark estimate of the project’s potential market value after all development work is finished.
This is one of the most crucial measures that developers should take into account, for obvious reasons. Lenders typically loan around 60% of GDV but in other circumstances may offer up to and in excess of 80%.
Loan to Cost
This is the cost of the loan needed to complete the project. Many lenders provide financing for projects up to 80%. The risk increases as the loan-to-cost ratio does, so borrowers can anticipate higher interest rates.
Level of Experience
Whether you’re a sole trader, a limited company, or an LLP, lenders typically value past experience. Many lenders are likely to want to see experience with comparable projects, so if you have prior experience, be ready to demonstrate your accomplishments.
Be Realistic
It can be difficult and time-consuming to obtain development financing for projects. Be honest with yourself about the resources you have at your disposal and the project’s timeline.
Under or overfunding a project might cause you significant problems in the future. It’s paramount that you are as precise as you can be while also leaving room for unforeseen circumstances.
How Finance Works For Property Development
First things first, you should choose the financing option for your property development that best fits your needs. You’ll determine how much money is needed for the improvements, and this will need to align with the loan limit, which will be decided by factors such as:
- The value of the property (based on a valuation report).
- The budget for your planned development. For instance, is this a simple or major renovation or a new-build construction?
- The anticipated value of your property following the completion of the work.
The amount that lenders offer varies, and there is no fixed amount or guarantee for how much you will receive. But typically, it’s a significant portion of the development’s value, sometimes up to 100% of the associated costs.
It’s important to bear in mind the fees associated with borrowing money. Your fees and interest rates will depend on things like the amount borrowed and the length of the loan.
Depending on the funding option you selected, you may be required to repay the loan in full after selling the newly developed property. In other circumstances, smaller installments over a predetermined period of time can be made.
Methods Of Raising Finance For Property Development
There are various programmes and private avenues you can use to apply for finance. You might occasionally need professional assistance, such as that of a mortgage adviser.
Make sure you do your due diligence on the kind of development you’re planning, and don’t jump in without having all the facts. In some instances, developers utilise loans to obtain planning permission, although doing so is often problematic because it can take a while to gain approval, which lengthens the loan term.
Sometimes, a request for planning permission is outright denied, which immediately puts a stop to plans.
Developers have multiple financing options. These include: (1) cash, (2) buy-to-let mortgages, (3) buy-to-sell mortgages, (4) bridging loans, (5) specialised property loans, and (6) personal loans.
Cash
For those lucky enough to have it, paying cash is perhaps the simplest way to finance a property development. Developers that pay cash can save interest and keep the build as affordable as possible. When looking for sources of funding for your property development project, using cash should be your first option where possible.
Buy-To-Let Mortgages
Those who intend to earn money from their property through rentals may qualify for a specialised mortgage. Most mortgages contain provisions that forbid subletting or letting. However, buy-to-let mortgages permit property owners to let out individual rooms or the entire house.
A buy-to-let mortgage has different eligibility requirements compared to that of a regular residential mortgage. Lenders typically charge higher rates and demand deposits between 25 and 40%. These mortgages are typically on an interest-only basis.
Buy-To-Sell Mortgages
Many standard mortgages will keep you tied down for around two years before you’re allowed to sell. That’s why it’s better to find a buy-to-sell mortgage if you want to sell your home quickly after carrying out renovations.
These mortgages frequently come with higher costs and call for a larger down payment. Though with this mortgage, you’ll have the freedom to sell whenever you are ready.
Bridging Loans
A bridging loan is particularly helpful for short-term financing. These often have monthly interest rates instead of annual. They are frequently utilised in a chain of properties when you wish to buy a new one but haven’t yet sold the one you already own. A bridging loan gives you credit for that brief period up until the point when your property is sold and you have the money to repay the loan.
Bridging loans come in two varieties: open and closed. These have different payback terms. Although they are far more expensive to maintain than a traditional high street mortgage, they can be used for a wider range of properties.
A property developer can use a bridging loan in the following ways:
To buy a property that high street lenders won’t approve.
Unlike typical finance, bridging can be arranged on any property, including homes, apartments, commercial buildings, land with planning permission, and even uninhabitable properties. This is usually the case for buying property at auction, when cash isn’t on hand.
For the purposes of securing planning permission.
Bridging loans can offer quick access to the financing required to buy a property while waiting for planning permission.
To bridge a gap in funding.
You’ve made an offer on a property, or your project has a deadline you can’t miss. The best way to quickly seize an opportunity is by bridging.
For refurbishments.
Bridging loans are a great option for developers buying properties at auctions since they can be used to buy uninhabitable buildings.
As a temporary measure while waiting for the completion of a high street mortgage application.
While high street mortgages can take months, bridging loans can be settled in a matter of a few weeks (or even just a few days).
To fix a broken chain.
Even developers get caught up in complicated chains. A seller of one property can secure their new one with the help of a bridging loan before their existing property is sold.
Specialised Loans
You might qualify for finance from a private organisation that provides specialised property loans. There are several options, including individual brokers that concentrate on acquiring capital for commercial or residential ventures, some of whom will even manage the transaction.
Even though specialised property loans are handled privately, they are still governed by the Financial Conduct Authority.
Personal Loans
Personal loans, also referred to as unsecured loans, are not secured by your home or any other asset. They are a popular credit alternative used to finance purchases (such as a property).
You’re usually able to repay the loan in full before the end of the term, and repayment schedules are often fixed rather than flexible.
Final Thoughts
As an investor, you may qualify for a variety of loans or mortgage options. Establishing a strategy is essential due to the industry’s complexity.
Each lender evaluates the variables in different ways, factoring in things such as project length, build type, valuations, borrower situation, and security. Be sure to do your due diligence at the outset!