Anyone can engage in property development. Whether as an investor, a developer or one in need of space, warehouse or building necessary to run a business. However, the massive capital such a project is a challenge. In which, it should not be the case. Thus, financing in the real estate sector is offering many ways that make it easily accessible to most.
1. Loans
Loans are the most common source of funding for a wide range of business pursuits. For property development, the kinds of financing products are numerous, diverse and may have different features. The terms will depend on the lender that often complicates things.
There are four popular types of borrowing for property development:
Bridging
In property development, bridging can be useful to purchase land; construct buildings, residences and facilities; and renovate property—even those that may not be passable for purchase for mortgages.
Bridging is short-term while interest accrued annually are higher. It is due to the flexibility of bridging to accommodate a wide array of business interests and fast cash withdrawal.
Second charge mortgages
Second charge mortgages, otherwise known as a secured loan. It enables you to borrow money with an existing asset set as security. The amount of lending will be a portion of the real value of your equity in the collateral property.
Secured loans offer low annual interest rates spread over as much as ten years.
Mezzanine Finance
Mezzanine financing is a hybrid of debt and equity. It likens debt capital in that it provides the lending party with the right to access ownership or equity interest in the company if the loan is not paid back fully and on a timely basis.
Mezzanine loans offer short repayment terms, require minimum collateral and as such command high-interest rates levelling with that of bridging loans.
The application process
The application process for commercial property development is much more tedious compared to that of a residential project.
Among the details the lender will request from you are:
- Site description and zoning
- Architecture and design
- A breakdown of the total estimated cost
- Projected sales figures with the profit margin
- Targeted completion dates of each stage of development through the finish
- Financial stability of the developer
- The equity available
- The borrower’s experience as a developer or investor
- The strength of your exit plan
2. Angel Investors and venture capitalists
As lenders take into account your track record, getting a loan application for property development may be challenging when you’re a newbie in the business. You may then consider turning to private lenders such as so-called “angel investors” and venture capitalists who have the cash but do not have either the expertise or interest to work on a business plan to put forward in the market.
While an angel investor can be considered anyone who has the risk appetite to invest in firms deemed to have high growth potential, venture capitalists do the same but with a more substantial capital flow that derives from investment companies, large corporations and pension funds.
So where funding for angel investors go by the thousands, that of venture capitalists can run up to millions.
Angel investors and venture capitalists pour investments in exchange for equity in the business.
When choosing the business plans worth their support, angel investors also factor in the societal and environmental innovations which are becoming primary considerations in property development nowadays.
3. Government funding
If you’re looking at developing a community with affordable residences, you may seek support from the government which has a program allotted primarily for this purpose.
The programmes may vary on whether you are in England or Wales.
Among the UK’s ongoing programs is the “Affordable Homes Programme 2016-21” wherein government shells out a £4.7 billion to subsidise the development of new shared ownership homes or other affordable homes in England during the six years.
The UK has also launched the “Home Building Fund” (HBF) which provides a £3 billion flexible financing facility accessible to small and large-scale builders and developers, custom builders and regeneration specialists.
The HBF lends between £250,000 and £250 million and offers smaller loans considered for innovative housing solutions and serviced plots for custom builders.
An HBF contract operates for five years for development finance and 20 years for infrastructure borrowing.
4. Partner with another developer
If you’re a starter, consider tying up with a reputable small-scale residential developer in a project the two of you would co-finance. You can serve as a junior developer learning from a more senior one. This way, you can boost your experience points and have an easier way of securing financing in the future.
Some lenders may include friends and family, especially the older ones who may be seeking be ways to increase their retirement income.
Funding tips
Prepare for additional expenses along the way: costs can quickly mount when engaging in a property development project. Always include a contingency in your estimated spending tally, say, 10 to 15%, so that you can prepare. It’s better to underspend than run out of cash.
Invest in education on real estate: while it may be tempting to jump in the real estate business with all the financing vehicles available today, you won’t get close to even getting a return of your investment if you only have an inch-worth of depth on how the business works. The high rewards in real estate make investing for formal education to learn everything about the economics of property development—from raw materials, construction processes and marketing of the establishment—worth it. This way you’ll also have a glimpse of what headwinds may come your way so you can try prepared for them.