When it comes to property development funding, the type of property venture you intend to embark on, together with the amount of experience and expertise you – or a partner have – will usually dictate the most appropriate source. In this article we outline how to get a loan for property development
What is property development finance?
Funding that allows you to invest in a property development project, such as an apartment complex, housing scheme or a small block of flats, is known as property development funding. Generally, though, the work is large-scale and involves either a ground-up development (building from scratch), a change of use (commercial to residential) or very heavy refurbishment.
Individuals, limited companies, small building firms and corporations can all apply for property development funding. Because the projects tend to be large, the sums being lent can easily venture into millions of pounds.
Lenders tend to judge applications on experience, credit scores and whether or not the individual or company has a good business plan.
Property development finance options
Bridging loans, buy-to-let or commercial mortgages and auction finance are all types of property finance. Property development funding, however, is for larger projects such as your ground-up new-build apartment block or small housing scheme.
The latter are projects which, as you would imagine, require millions of pounds in funding to get off the ground. The type of funding lenders will provide is up to 80% of the cost of the build, including the land. The applicant usually sources the remainder.
In terms of the other types of loans available, bridging finance for property development is probably one of the more popular for smaller property development projects. This is often taken out by those keen on carrying out a refurbishment. It’s a short-term loan with high interest so that at the end of the six or 12-month term (bridging loans are rarely for more than two years), the applicant either pays off the remainder of the loan or refinances to another product with a lower rate of interest, such as a mortgage.
Usually, with this type of loan, it is secured against the property/land itself, or an existing property. The lender will usually also want to see your exit strategy to ensure payment at the end of the term.
Personal Savings
If you are wondering how to finance a property development business then the simple answer is that the more of your own money you can put towards your property development, the better.
That’s because you won’t be paying interest on it. This isn’t always possible, of course, especially when you are just starting out. As you continue on your property development career, though, you should aim to put down more money each time.
Re-Mortgaging
The option to re-mortgage an existing property involves using equity built up on that property over the years. This could be because you’ve paid off a considerable amount on the mortgage or it is the result of the property gaining considerably in capital value over the years.
Further Advance
It is possible to ask your existing mortgage lender for an additional sum as an advance. The money is gained quickly; however, you’ll pay interest on it – at the same rate at which you are paying off your mortgage. It also means your mortgage on that particular property will take longer to pay off.
Joint Venture Development Finance
It’s not uncommon for a property developer to join up with a funding partner. The latter benefits from the skills of the former while the developer gets the funding he or she needs, as well as possibly a degree of experience. This type of strategic development partnership is called a Joint Venture. Profits are usually shared – at an agreed rate beforehand – on completion of the project. It’s one of the more popular development funding options around.
Residential or Commercial Property Development?
Depending on whether your property development is a commercial venture, or a residential project, there will be particular options open to you.
Residential & Buy-to-Let Property Finance
If the development or refurbishment project you are seeking finance for is a property you plan to rent out when ready, then a buy-to-let mortgage may be your best option for finance.
A lender will decide whether or not to provide funding based on the amount of rental income you expect to receive.
You will have to put down a bigger deposit for a buy-to-let mortgage (usually around 40%) than a standard residential mortgage. The rate of interest will also be slightly higher but then, you will only be paying back the interest on it, as opposed to a capital repayment mortgage.
Commercial Property Development Finance
The type of property that qualifies for a commercial mortgage often includes office units, retail outlets, hotels, warehouses and agricultural or development land.
This mortgage works in a similar fashion to a residential mortgage where, for instance, a hairdresser wants to buy her shop outright rather than pay rent on a continual basis, but doesn’t have the money to pay it off right away.
If you are developing commercial property from scratch, then a commercial mortgage can be much more difficult to obtain. That is because lenders view it as a much riskier venture. A good track record certainly helps in this respect. So, too does evidence of planning permission and a good business plan, complete with an exit strategy.
How extensive are the building works going to be?
We have found that development work tends to fall into one of three basic categories – light refurbishment, heavy refurbishment or ground-up development.
Light refurbishment
As its name suggests, this work tends to be minor and minimal, such as redecoration. It could also involve fitting new doors and lowering ceilings.
Heavy refurbishment or renovation
Moving internal walls, rewiring, and partial demolition would be classed as heavy refurbishment for the purposes of finance development.
Ground-up development
This is when no building has existed in the first place, such as putting up a New Build or adding on an extension to an existing property.
Property development finance in practice
For light refurbishment projects and even heavier ventures, bridging finance is usually the most obvious source of funding. This is usually available for from three months to two years – at the end of which it is usually possible to convert the existing loan into a mortgage.
Ground-up developments usually require property development funding to get going and the developer will be expected to fund around 20% of the cost of the build him or herself.
Experienced developers can use equity on existing property investments to fund further developments and grow their portfolio of properties.