The development of property projects might serve as an excellent tool towards achieving success in property development. Whether it’s residential development, conversion, or improvement of properties, you need to have your finances sorted and a plan set.
Through familiarizing yourself with the available options on the market for your property development, you can be sure of making wise decisions concerning finances. Taking your potential into account alongside your costs, you can create a realistic repayment plan to ensure you are confident with your finances.
What is Property Development Finance?
Property development finance is a specific type of finance to help fund property, major improvements and developments. Unlike a mortgage which will typically fund an existing property, development finance will be based on how much you expect to spend and when you expect to complete your project.
Typically lenders will request:
Purchase price of property/land
Costs of development and improvements
Gross Development Value (GDV)
Planning Permissions and approval
Experience of the developer and how much they will be investing
Repayment plan
Depending on your facility, you may receive staged payments to help fund different parts of your development.
What Makes a Strong Development Project?
Creating a detailed plan can help you show lenders that your project will be profitable. Prior to consulting lenders, one must keep in mind the following:
1. Prepare a Comprehensive Budget
An effective budget should involve:
- Price of purchase
- Development expenses
- Fees for professionals
- Insurance
- Legal expenses
- Financial costs
It would also help to include a backup plan to cover any unforeseen expenses. For example, unexpected delays, increase in material costs and unknown structural issues.
This gives you a clear insight into what you require to fund your development.
2. Know the Potential of the Property
Where and what condition the property is in can help determine how much potential it has.
Research the local area to see if there is demand for properties, what similar properties have sold for, rental opportunities and any planning restrictions. An independent valuation can help ensure your anticipated GDV is realistic.
3. Understand the Finance Options
Some development loans will be for the initial purchase of the property and then staged payments for the development itself.
The lender may require a monitoring surveyor to check on progress before they release further funds. You should create a detailed schedule for your development and keep in contact with your contractors.
By knowing what finance you’re going to receive you can avoid any cash flow issues.
When Can Bridging Finance Help with Development?
Not all property projects require the same type of finance. Some will require quick funding such as auction purchases, securing the property before someone else and short completion periods.
Mortgage bridging loans may be an option.
Bridging finance is typically used for short-term needs. This can help investors secure a property quickly or whilst they get their longer-term finance in place.
However, bridging finance is very different to development finance. Bridging loans are typically used for short-term property deals whereas development finance can give staged payments for your development.
Depending on the condition of the property, your development plans, how much you require and how you plan to repay, you can choose the right option.
Key Costs to Know
It is important to know how much money you will be borrowing.
Depending on your lender and facility you may have:
Arrangement Fee
Interest
Valuation & Monitoring Surveyor Fees
Legal & Administration Costs
Exit Fees
Extra costs for extensions and delays.
Your interest may be paid during the term of your loan, or added to the outstanding balance.
You should look to understand how much you are borrowing in total. A detailed look through your loan agreement can help you understand any extra costs.
Why Is an Exit Strategy Important?
When doing property development finance, it is important to have a defined exit strategy.
Lenders typically want to know how you will repay your loan at the correct point in your project. This can be done by selling your development or refinancing onto a longer-term mortgage.
For example, if you are developing residential apartments you may plan to sell them to repay your development facility. Alternatively, if you plan to keep the properties as rentals, you may wish to refinance.
Your exit strategy should be based on realistic assumptions around the value of your property, demand and how quickly you can sell or refinance.
You should also consider alternative repaying options.
How Can I Choose the Right Finance Option?
Taking proper account of your development objectives and finances leads to the best finance selection. The steps to follow before making a choice are the following:
Evaluate comparison of finance options and overall cost of the loan.
Identify the lender's requirements.
Think about how much finance will be borrowed.
Look at the repayment terms and exit strategy.
Get professional advice.
A specialist property finance broker may help you understand what options are available for your development.
FAQs
1. What is property development finance?
This finance is usually used for securing a piece of land, building new structures, making conversions and doing other major renovations.
2. How is Development Finance Different to a Mortgage?
Typically a mortgage will be used to fund an already completed property. Development Finance will help fund your project during development or major improvements. Development loans can be paid in stages.
3. Can I use Bridging Finance to Purchase a Development Property?
Yes! Bridging Finance is applicable in making intended short-term property purchases. These may include purchases at auctions and quick completions. However, you will need a realistic repayment plan in place and meet the lenders criteria.
4. What Do Lenders Look for?
Lenders will typically look for how much you expect to spend on your project, how much you expect your property to be worth when completed, your planning status, experience, security, how much you are investing and your exit strategy. This will vary per lender.
5. How Can I Reduce Risks?
Making a practical budget and obtaining expert valuations of your property will allow you to take into consideration any unforeseen expenses as well as incorporate a sound back-up plan that will help lower the risks involved. It’s crucial in deciding on a strategy for repayment.
Final Thoughts
When it comes to property development, you will need to create a practical budget and repayment plan. If you clearly know your possibilities, you will make well-informed decisions.
The use of specialized property financing solutions offered by Silver Oak Capital makes it easy for investors and developers gain insights into the available options.
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