Are you a property developer, an investor, or a landlord that is looking for funds for your property development project? Good news! There is a range of financing available to help you kick-off your vast project. The alternative lending market could be enormous and complex. It would help if you made the right choice on how to fund property development.
To illustrate, an experienced developer knocks at the doorsteps of lending firms and banks bringing their detailed and well-researched proposal. However, after the conversation, they’ve turned away.
A scenario is a joint event to developers who do not have rapport and established a relationship, sufficient equity to do the project and access the funds needed. The developer will approach alternative lenders. However, the lending market could be hesitant to allow someone to lend money for an important project who hasn’t established a track record.
Experienced property developers often use property development financing from renovating a single residential house to constructing new residential developments. Unlike traditional financing, property development finance offers a more significant portion of build costs in advance. Unlike many other loans, this type of credit can be taken in tranches depending on the timeline of progress of your project.
Furthermore, property credit providers will vary. Each of them will assess factors like the strength of the project, build type, valuations, history of the developer, borrower circumstance, security, and rates.
Still, it doesn’t have to be complicated. Here are points to ponder to understand property development financing better:
· Minimum loan sizes. The loan size will depend on the lender. The fund could start anywhere from £50,000 to 2.5M.
· Loan to Gross Development Value (GDV) or called an end value is the valuation metric that is calculated to give an idea of what the project could be worth in the open market after the development is completed. Usually, lenders will start at a GDV of 60%-65%
· Loan to cost. The amount of credit required to build the project. Most of the lenders will offer up to 80% of the project. However, remember that the higher the ratio, the higher is the risk. So a borrower should expect higher interest rates.
· Terms are usually between 12-24 months
· Experience is essential for lenders. Most of the lenders will likely want to see experiences similar to the project you proposed. The experience will give them the confidence that they will not lose money and the project will succeed.
Choices on how to fund property development
Commercial mortgage
The fund can be used to purchase a commercial property like shops, offices, and warehouse. They work the same as private mortgages. The most candid commercial mortgage are those taken out by existing business who want to buy their site where they already live. For example, a dentist renting a space in a building. Instead of paying large amounts of rent for years, she would prefer to own the property. However, the dentist cannot afford to pay for the property outright.
Owning the property will now be possible through a commercial mortgage. However, the dentist will need favorable circumstances such as sound business record and history of operating the business in the same premises.
Existing businesses can easily access a commercial mortgage, and it is possible also for those who are new starters.
Auction finance
Auctions can be a quick way to get a property at a discounted price. When winning the bid, the auction properties usually require funds within 28 days. It means that you have to move fast to secure your funding.
In auction financing, you can get the money quicker than the norm. Some lenders are too generous who will give you funding before you attend an auction to arrive with an “agreement in principle.” This type of arrangement can be useful for experienced and well-established developers that have built their steadfast trust in the lending firm.
Bridging finance
These are short-term interest loans which are usually accessed by borrowers that have an immediate need for funding. These loans could be approved, and cash will be given so fast allowing the developer to close a deal to a property before someone does.
Here are ways on how a property developer could use bridging finance:
· To purchase a property that High Street lenders will not consider
Unlike traditional loans, bridge financing can pay for any feature such as a house, flats, commercial units, land with a blueprinted plan, uninhabitable property that can no longer be under any mortgage agreement.
· To secure planning permission
Quick access to capital fund needed to purchase a site while still applying for a consent
· Bridge a funding gap when you are buying or renovating a property
You may have a house renovation project, and you made an offer for this property. You are at risk of possible delay because of funding gaps. This credit platform is an ideal solution for you.
· Refurbishment project
The credit can be used to purchase properties that can no longer be utilized for decent living or not even for commercial purposes.
· The temporary solution while waiting for the High Street mortgage application to be approved
Bridging loans can only take a few days or weeks, whereas High Street mortgages can take months.
· Fix a broken property chain
Many developers is caught-up with broken property chains. Bridging loans can enable a seller of a property to secure their new property before closing their sale of the existing property.
· Fix a broken property chain Even developers get caught up in broken property chains. Bridging loans enable a seller of one property to secure their new property before the sale of their existing property goes through.