Property development finance UK
If you’re looking to kickstart a large-scale property development project or want to renovate a buy-to-let property, you might be exploring your property finance options.
Although property finance can be complex for even the most experienced of property developers, don’t panic: our guide should help clarify a few things.
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How does property development finance work?
Property development finance is a type of business finance used for the purpose of funding a residential, commercial or mix-use property development. It’s a fairly broad category that covers term loans, mortgages, bridging loans and even personal loans. It refers to the large-scale funding of significant building or renovation works.
You might use it to fund a new residential housing project, workspace development or regeneration initiative. Development finance is likely the most appropriate form of property finance for ground-up developments, such as building a property from scratch.
Private property development finance
If you want to invest in a private residential property but don’t have the immediate funds available, private property finance can help. Both private individuals and residential property developers can apply, as can property companies and building firms.
Eligibility criteria varies: some lenders will expect a detailed business plan whereas others will focus more intently on your credit score. Among other factors, having a well-thought-out investment strategy in place when you approach a lender can help you get a good rate.
First time property development finance
If you’re looking to take out property development finance for the first time, there are a few things to consider. Firstly, you should work out which property development finance option is most relevant to your circumstances.
For instance, if you want to borrow money to buy a property to rent out, you’ll require a buy-to-let mortgage.
A bridging loan, on the other hand, might be suitable if you want to buy a new home but haven’t sold your existing one, or if you want to purchase a property and renovate it (paying the full loan amount and interest upon the subsequent sale of the property).
Before committing to a property development project, conduct research into the local market you’re looking to purchase in. You might be considering setting up a limited company – if so, you should seek professional tax and legal advice.
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Ground-up property development finance is designed for larger projects and covers the price of the land and part of the construction cost. Property development finance is usually around 70-80% of the build cost. The developer must source funding for the remainder.
For short-term refurbishmentprojects, a bridge loan could be the most suitable type of business finance to opt for. Bridging loans are designed for the short-term until the loan can be paid back or a longer-term type of finance is secured.
Large renovations, on the other hand, could be funded using longer-term bridging finance or a commercial mortgage.
The term ‘property finance’ (without the ‘development’) is a catch-all term that applies to a variety of finance options relating to the property sector. Bridging loans, development finance, commercial mortgages and auction finance are all types of property finance.
Building development loans
Take a look at the different building development loans available and what they’re used for. Once you’re ready to apply, see your funding options.
If you’d like further clarification on what type of property finance would suit your circumstances, feel free to get in touch with the Funding Options team at [email protected].
How extensive are the building works going to be?
This is the most important question to ask before you explore your finance options for refurbishment or renovation. To determine what type of finance you need, it’s useful to think of projects in three broad categories:
The terminology in property development isn’t rigorously defined, so what some people consider a ‘light refurb’ could be considered heavy by others — and somewhat confusingly, all of the above are types of ‘development’.
Property development finance in practice
Depending on the type of project you want to embark on, there’s a world of finance options available. You might want a ‘refurbishment bridge’, which funds 3-24 months of building costs and sometimes comes with the option to convert into a mortgage later on. This type of product would cover the majority of light and heavy refurbs.
Then for more extensive projects and ground-up developments, you can find ‘development finance’ to cover both land purchase and building costs. For example, if a developer wants to buy a plot of land for £100,000 and spend another £500,000 building properties on it, a lender might finance 50% of the plot purchase and 70% of the build.
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In this example that would mean the developer would only need £200,000 of their own money, rather than the total of £600,000 that the whole project costs — freeing up their personal capital for other projects, or unexpected expenses.
Experienced developers who act as landlords can also use property they already own to secure lending. With enough equity free in your portfolio, you can get finance to buy more properties — allowing you to grow your property portfolio without having liquid cash.
FAQs
How do property developers raise finance?
Property developers can bolster their chances of being able to raise finance in many ways. Getting planning permission (if required) is just one important step to make. Bear in mind that a robust application will also set you on a positive footing – fill in documents carefully.
How do I get started in property development?
Many property developers hold down a full-time job when starting out to guarantee regular income. You’ll need to work out what type of property developer you want to be, e.g. commercial or residential, ground up or light refurbishments.
You should also spend some time exploring opportunities and exit strategies, and learn how to leverage property development finance.
Can you get a loan for property development?
Yes – if you’ve got the right exit strategy in place and the lender deems you eligible, you can get a loan for property development.
The type of loan you get will depend on what you need the funds for. Auction finance, for instance can help you to get a discounted property at auction. Our Finance Experts can help you identify the right type of finance when you enquire.
Final thoughts
As you can see, property development is a complex area, especially when it comes to finance. Ultimately, the best first step to take when determining what type of finance you need is to assess how extensive the project is, how long it will take, and how much it is likely to cost — in both the best- and worst-case scenario.
All successful property developers are good planners, and getting the right finance in place is a crucial ingredient in development success — whether you’re buying your company’s premises, or growing your rental portfolio.
If you’d like to speak to a Business Finance Specialist, get in touch on 0333 344 1015 or [email protected]
Source: https://tholansonnha.com
Category: Finance
