How property development funding works
The process from property acquisition, development, and sale to investors can take several months or even years to complete. Property development loans can generate potentially huge profits for property developers.
As an investor, you may still need to put up some type of collateral receive the loan. Most lenders will ask the developer for a down payment on the property.
To avoid paying interest and fees, the investor can offer to provide a credit facility. The credit facility is a way to pay the preliminary costs of the development. Investors also need to provide personal guarantees for the loan.
Make sure to do your research ahead of time. Know exactly what you are looking, and the location of the property you’re interested in buying. It is important that you find personal guarantees.
This will ensure that the loan is 100% yours and not based on a collateral promise. This will help you keep your property development financing affordable.
Most lenders will finance a percentage of the site purchase, as long as relevant planning is in place. The risk posed to the lender is much greater during the construction phase, and the security more difficult to sell in the event of loan default.
If you have an interest in property development, you can approach a company or group of investors to get funding. It is important that you know a little about what you are getting into.
You should work out carefully who you are looking to attract as potential investors. For instance, if you want to make money from rental properties, you will want to target properties in areas that are likely to become attractive to tenants in the future.
A piece of land may not be suitable for development depending on the location and the population. You can search the local market to see if there are any properties that fit your criteria.
It is important that you do not miss out on a good investment, simply because you did not realize it was a good investment. When shopping around, try to find something that will fit your lifestyle.
The location and the amenities included should also be considered. You can always hire a consultant to help you with the process of how you can finance a development.
A professional will look at the current market conditions and at the current trends. Their knowledge can help you decide how to handle the negotiations when you buy or build a property.
Take advantage of their experience to save money. Understanding how property development funding works is crucial to making a start on development project plans.
Do property development loans have additional costs?
A lender will look at the location, clients experience in similar projects, loan size, and the overall loan to GDV (end value).
There may be other fees to consider. Most lenders charge an arrangement fee of 1-2% of the loan amount.
Some lenders will also charge a redemption fee of 1-2% of the loan amount when the loan is redeemed.
The redemption fee is sometimes charged on the gross development value. Sometimes a broker fee 0f 1-1.5% will be charged and added to the loan.
How to apply for property development loans
Lenders assess the predicted value of the property once the development project is complete. To apply for a loan, you must submit an application.
The application should show how much you paid for the property, the cost of the development and professional fees, and building timescales.
A bad credit rating will have a seriously detrimental effect on an application. , so borrowers need to make sure they’ve checked it before they apply.
Even after loan approval, the borrower will still be monitored throughout the project.
The interest paid on the loan will be negotiated with the lender during the application process.
To apply for funding from any source, you need to be well prepared. The basic process to follow include:
- Demonstrate your credibility
- Plan for multiple locations
- Plan for working with multiple lenders, not just your preferred lender.
- Do your research and create a detailed cost analysis of the projects you’re planning for.
What do lenders look for when assessing property development loan applications?
- Personal details – including name, date of birth, and address of borrower or the directors of the company.
- Details of any planning permission – includes planned revisions or future applications.
- Detailed costs and timescales – should be broken down by month and what the loan will be spent on.
- Details of professional advisors – includes architects, accountants, solicitors and contractors.
- Updated development CV for all borrowers – include details on previous developments undertaken.
How to keep your property development costs low
Keeping your development costs low will result in a better profit for you, and your equity investors in the project.
It is easier to secure funding for lower cost projects than for relatively higher cost projects.
Having a disciplined approach to property development can help you build successful projects.
What can you do to keep costs lower?
- Contractors and vendors
Due diligence is important when hiring essential experts. Working with the right vendors and sub-contractors makes a big difference in cutting costs.
Speak to other real estate developers in the location to ask about their costs for similar developments.
- Project size
It is better to develop a small project that ends up being fully occupied, than a larger project that has a high vacancy rate.
- Construction timeline
Focus on buildings or properties that don’t need as much work. Full construction projects take longer and have no ongoing operating income until leased up.
- Pre-development planning
Know what costs to put in your estimates, and what to expect on site. Think about things that could realistically happen, not just your best-case scenario.
You may need to have a contingency item in your budget to cover unexpected cost overruns.
Types of property development funding
- Private financing
Both private individuals and residential property developers can apply. Some lenders will expect a detailed business plan and others will focus more on your credit score.
Have a well outlined investment strategy in place when you approach a lender. This can help you get a good rate.
- First time financing
- Building construction loans
Building development loans are for more extensive projects and ground-up developments. Experienced developers can use property they own to secure funds.
Reasons for seeking property development funding may include:
- Buying land or property
If you have found a property or land you wish to buy, getting financing quickly may be important in making your property development plans real.
- Financing planning expenses
Planning costs are often underestimated. Funding can help pay for external consultancy.
- Development costs
Some lenders will cover up to 100% of the development costs depending on the project.
- Selling costs
Selling a completed development has costs including marketing. You need funds to cater for such expenses.
We can fund diverse projects such as;
Hospitality (hotels and resorts)
green energy projects
Logistics and transportation related developments
Residential and housing developments
ground up construction
commercial real estate
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