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Got some important funding decisions to make? If the answer is yes, then it’s a good job you clicked on to our site. When planning to undertake property development, there are some significant funding decisions you will need to make. You’ll need to make the right choices, especially when choosing the property development finance that works best for you and your development needs.
Take a look at our quick guide to property development finance below. The topics in our guide will include:
- Property Development Finance Explained
- When Financing May Be Necessary For Development Projects
- What Are The Different Types Of Property Development Finance?
- How To Apply For Property Development Finance?
Property Development Finance Explained
Property development financing provides funds for either significant new building projects or substantial renovations. Think about new housing estates, designer homes, apartments turned into office buildings, etc. It works for properties used for residential, industrial and mixed-use.
Property development finance is a short-term loan for residential housing developments, such as construction projects, which is typically funded as a land purchase loan and a development cost loan in split payments to turn a property into flats or HMO’s.
When Financing May Be Necessary For Development Projects
A project’s size and complexity will determine what kind of financing options are available. Ground-up development financing will need to be sought for big projects. It includes the purchase of the land and funding for construction.
Financing for property development is usually equal to around 70-80% of the cost of the building. This means the developer would be left to find the rest of the funding.
If a more extensive portfolio of assets is purchased, it can be used as backing rather than allowing the developer to fund the project with their own cash reserves.
What Are The Different Types of Property Development Finance?
When funding choices are customised to a particular project, it can sometimes be frustrating to try and understand which to follow.
These are the various forms of financing for the development of property that is available in 2020:
Commercial mortgages are used to help you buy property such as warehouses, manufacturing units and shops. If it is not private residential property, a commercial mortgage may be used to purchase it.
By far the simplest of the financing structures to understand, they operate in much the same way as a typical private mortgage spreads payments for several years to match your needs.
Auction finance is primarily used for the acquisition of auctioned properties by land buyers.
Most auctions allow tenders to be paid within a specified amount of time (up to 28 days). Having exposure to broad rates of finance in a limited amount of time is what this form of funding does best.
Bridging finance is a short-term financing alternative that can effectively “bridge” the gap between purchasing a property and obtaining a more permanent form of financing for it.
These are typically limited in length, usually lasting a few months, but tend to provide funding very quickly. They are also instrumental when buying property and completing a fast refurbishment or building construction (turnover of property). These will serve as short-term mortgages between purchasing and selling properties at the auction.
How To Apply For Property Development Finance?
When applying for financing for property development, it helps to do your research. This means ensuring that all plans and predictions have been well thought out and that any possible obstacles have been bridged.
Lenders base property finance loans on the viability of a project, making it essential to ensure that you can show that the project has the potential to produce revenue and profits.
If you’re experienced in property development, then hopefully you’ll be able to show a solid track record. Still, if you’re new to the property development field, you may find that it prevents you from the most significant property development projects, and lenders will see you as a potential risk.
There are still exceptions, though, and an information gap can be made up of some reliable and well-researched estimates based on parameters that your lender can understand.
How is Buy-To-Let Lending Decided?
You would also need to show a guaranteed minimum income before a buy-to-let lender accepts you. The actual income level will vary from lender to lender, some of which may be high, others lower to ensure that you have access to the entire sector, it is best to demonstrate a stable current income.
If you have multiple properties (and thus many mortgages), you will experience that the amount of pre-existing mortgages you have will preclude you from applying. At this point, you might want to streamline your property finance by looking at portfolio finance.
Lending Relies On Property Yield
The key to a good investment in property is its ability to produce profits. The best way to measure how much money a property will produce is through rental income.
Return is the rental return as a percentage of the purchase price of the property. So after you’ve purchased, invested, and updated the house, the overall cost will decide how much you borrow, but the final house yield estimate will determine the lender will lend and what rates it will pay.
Why Is GDV Important?
Your Gross Development Value (GDV) would be one of the foundations of your application for funding property development. It lets your lender know if your project is lend-worthy. Many lenders may not consider an application if the total cost of construction exceeds 75% of the GDV or the final value of the project.
Valuable investment is one that enables the lender to lend 65% of the GDV, even though that is equal to 100% of the overall cost of construction.
Experience In Property Development Helps
Having experience in the construction of property cannot be underestimated, and lenders like to see some prior involvement in a project, however small, that has been successful and profitable. It’s great if you have an excellent team of designers, planners and architects on your staff.
If you’re planning to develop a property or looking to buy at the auction, we can help you figure out what’s best for your business.