Many property investors and developers dream of making a mark in the property development industry. What often stops them from pursuing their dreams are their finances. Before beginning any development project, it is crucial to first understand how much you can borrow and how much you will be able to handle costs associated with property development.
The property development market is a lucrative venture, but it requires considerable financial backing. There are a number of ways you can finance property development, such as development finance, commercial mortgages, bridging loans and buy-to-let mortgages.
For anyone new to property development finance London, this post on how to raise funds to finance a development project will help you make an informed decision depending on your financial condition and what type of property you intend to buy.
Hence, to help you make the right choice, here are some major types of funding options available.
#1 Property Development Finance
Property development finance is a short-term loan that is extensively used by property developers for refurbishments and development projects. As it is particularly designed for development work, development finance offers a bigger part of the development costs in advance. Development finance can be used for commercial, residential and mixed-use projects.
In order to find the most favourable terms, you can compare different development finance rates from multiple lenders. A specialist development finance expert will help you familiarise yourself with all available lending options and may have access to private lenders who you may not otherwise be able to access.
#2 Bridging Loans
A bridging loan London is another popular form of finance that may be the best option for property developers. If a property developer wishes to complete a property purchase without having to sell the current property yet, bridging loans can help them bridge the gap for that short period and allow them to complete a property purchase.
Bridging finance is best suited for property developers and landlords looking to redevelop property or ground-up development work to improve its potential sale value. Bridging finance has a shorter duration compared to other types of loans and it comes with monthly pricing rather than annual interest rates.
#3 Buy-to-let Mortgages
Buy-to-let mortgages are usually acquired by anyone who is looking to purchase a property as an investment and wishes to start a rental income. The owner of the property doesn’t intend to live in the same property. A key advantage of buy-to-let mortgages is that they offer favourable terms and rates compared to other forms of finance.
Bridge to let mortgages eligibility criteria usually vary from traditional residential mortgages, with lenders usually requiring up to 40% deposit and more expensive interest rates. Moreover, buy-to-let mortgages are interest-only loans, which is important to keep in mind.
#4 Commercial Mortgages
Commercial mortgages are often used by property developers to fund the purchase of property, which is not your personal home. A commercial mortgage could easily be used to raise funds for developing shops, a warehouse or constructing a commercial building. This is quite common amongst small as well as large business owners who are looking to buy a commercial property without creating a financial burden.
Commercial mortgages work pretty much the same way as traditional mortgages, but the key benefit of using a commercial mortgage is it allows the business owners to spread repayments over a longer period.
Regardless of the type of loan you opt for, it is essential to prepare your application in advance to improve your chances of approval. Here are some tips that will help you get your application approved quickly.
4 Tips to Increase Your Chances of Application Approval
As a property developer, you will have to take into account what lenders look for when granting funds to development projects.
#1 Understand your borrowing capacity
Before you apply for a loan, you need to figure out how much money you have and how much you can borrow. This will prevent you from planning a project that’s out of your budget. Based on your property development plan, assess standard finance criteria and the feasibility of your project, recognise how much money you will need to fund your project. Any lender would be happy to give you a loan if you can demonstrate that you are in a stable financial situation.
#2 Create a feasibility study
Creating a feasibility report is essential to convince the potential lender that you have all aspects of your property development plan in place. You must demonstrate that you have accurately calculated the construction costs and the potential ROI because that is how you will repay the loan. Without a decent profit margin, lenders may be hesitant to grant the loan. Your feasibility report should include all the costs pertaining to building expenses, sales costs, permissions, taxes and overruns.
#3 Present details of the project
To further strengthen your application, you should put together all the vital details of your project with all the numbers mentioned as accurately as possible. This includes an executive summary of the viability of the project and its design features, such as site description, design concept, feasibility study, costing, timelines and end results. The more realistic numbers and details you include in the application, the higher the chances you have of getting your finances approved.
#4 Clear your credit history
Lenders perform a thorough credit check before deciding to release funds to a property developer. Most lenders are reluctant to offer development finance to developers who have defaulted on their payments. Also, applying many times in a shorter time span is a red flag. Hence, if your credit history is not clean, you will have to take proactive steps to clear any patches. Even if a lender agrees to grant a loan, despite a bad credit score, you will have to pay higher interest than regular.
Property development requires some sort of outside funding if you are new to this market or undertaking a huge project. It is up to you how you finance your project. However, it is essential for you, in any circumstance, to manage the overall costs and expenses of the project. Besides, it is important to understand how long it will take to complete the project and how much return you expect to generate from your project, which will eventually be used to repay the loan.