When looking for finance for property development, it’s important to choose the right type of loan from the outset.
Property development finance is a broad description that covers funding for residential, commercial or industrial developments, whether new build or refurbishment, and it can be used for the purchase of land or existing buildings or to fund the subsequent construction or renovation work.
From our experience in sourcing funding for both refurbishment and ground-up developments over the years, here are some tips to help you make the best choices for property development.
1.Know Your Market
The first rule of any property development project is to really understand the local area and the property market there. Which are the up and coming areas? If it’s a university town or city, where do the students live? Where are the best schools? What’s the public transport like? What are the traffic patterns? For larger and more complex schemes, a feasibility study will need to be conducted by a major surveyor, in order to ascertain a detailed understanding of the local micro factors and larger macro factors that could affect the project’s viability.
This way you won’t be building 5-bedroom family homes in an area that really needs affordable homes for first-time buyers, or building student accommodation in an area already saturated, or with a committed pipeline of projects that will satisfy the local demand.
If you are building to rent with a buy-to-let mortgage, study the local economy to make sure that there will be consistent rental demand to cover your repayments.
2. Own The Land
If you have ownership of the land you are building on or the property you are converting, without any mortgage or outstanding loan, it will make a huge difference to the amount of funding you can raise. In many instances, you will be able to borrow 100% of the building costs. If you don’t personally have development experience, you may wish to leverage the fact that you own the land, by arranging a joint venture with a local developer, who will split the profit with you once the project is completed.
3. Try Auctions
If you’re looking for a bargain, an auction can be a great place to find property at knock-down prices. However, you need to pay quickly once you win, so you need a fast way of arranging finance, which is where a bridging loan can help. A specialist bridging finance broker can help you arrange the right funding within your timescales.
It’s also worth asking if you will be able to arrange funding in principle in advance of the auction, particularly if you are a seasoned developer with a track record of this type of project.
4. Arrange Planning Permission
Even before applying for planning permission, find out if you need it. Many residential refurbishments and conversions can take place under Permitted Development Rights, especially if the work is internal only; although this will still require specialist consent, it is much easier than submitting a fresh planning application.
If you do need planning permission it is advisable to arrange it before looking for funding as it will be much easier to get a loan and negotiate a better rate, for the purchase of land or property that can definitely be developed. At the very least you should obtain Outline Planning Permission to provide evidence that it will be possible to build there. If that is not possible, you may be advised to take out a bridging loan in the short term until planning permission is granted.
5. Have All The Information At Your Fingertips
As well as the amount of funding you need, potential lenders will want to know the total value of the investment, (and, from that, the Loan-to-Value ratio), the feasibility of the project, the assets you can offer as security, the length of the project, all the anticipated costs and any contingency plans in place. They will also want to know the expected sale or rental value of the finished property and your exit strategy.
6. Plan Your Exit
If you are using short-term finance such as a bridging loan to purchase and develop the property you will need to work out what happens at the end of the term. Once the construction phase is complete, developers often exit by converting the loan into a mortgage or by selling the property. A strong exit strategy is one of the key factors a potential investor will ask for before committing to a short-term bridging loan.
7. Know the difference between Bridging Loans and Development Finance
Both bridging loans and development finance are short term loans to cover the cost of a building project.
Bridging loans tend to be used for refurbishments or when the circumstances for purchase do not suit a conventional funding route, for example buying at auction, from a receiver or when you want finance fast.
Property Development Finance is normally used for ground-up developments or major renovation projects and can cover both the purchase of the land and the subsequent building costs.
An experienced broker will keep you right and help you apply to the right lenders for exactly the right type of loan for your individual situation.