If you have been considering diving into property development, or have had past experience, you will know first-hand how much of a roadblock funding can be. Lack of capital can make otherwise excellent projects impossible to undertake, hamstringing larger projects due to a complete lack of flexibility.
Of course, you likely knew this already, as the first logical step in beginning property development is securing the capital to realise your grand designs. However, with so many options available, and so many ways to use them, the question of which to choose quickly rears its head.
In this article, we will discuss some of the best property development finance options, how to secure them, and how they might be best put to use.
What does property development finance mean?
Property development finance is an umbrella term that covers any form of business finance that is put toward the development of properties. This includes any type of property, from commercial properties to rental ones. Property development finance can be sought by anyone, be it an individual looking to renovate a dwelling, or a corporation specialising in property development looking to fund a sizable project. While you shouldn’t be discouraged to undertake a large project as a small business or even as an individual, keep in mind that you must meet the criteria of your chosen lender for a successful application.
Forms of property development finance
There are a whole host of methods to fund property development, from making use of the equity of your existing properties, partnering with other property developers, or simply taking a private loan. Of course, there are far, far more than just those three. So many, in fact, that it’s easy to be paralysed by the choices available. Here, we’ll outline a few good options for your consideration.
Bridging Finance
One effective method of sourcing capital for property development is bridging finance. It can be used to fund almost any aspect of property development you can think of, providing developers with a large sum of capital at short notice. This is particularly useful when time is of the essence, allowing you to seize an opportunity that may otherwise slip through your fingers if you were to rely on other, more traditional forms of finance. Bridging finance is also much less reliant on your credit history, as bridging loans are secured against property you are willing to put forward. The versatility offered by bridging finance makes it a very competitive choice indeed, provided you have a good plan of action.
Seller financing
This option is admittedly quite unorthodox and often one that is overlooked, though it’s for that very reason we have included it here. Seller financing is, as you can no doubt surmise, a role reversal from the usual scenario that plays out during a sale. Instead of the buyer paying the seller, the seller will agree to finance the sale of their own property, often to a considerably firm set of terms. It is in a similar vein to using debt as a bartering chip, where buyers offer to take on a portion of the seller’s debt, usually in exchange for waiving a deposit or reducing the asking price. These options are certainly niche and not ones to take lightly, but unusual approaches might be exactly what you need to achieve success in such a competitive market.
Private lenders
This is by far the most commonly used method and not without reason. By using this method, you are fairly likely to find your funding, be that from an “angel” investor or from an individual attempting to establish themselves as a lender. Having a strong credit rating is often required for this form of property development finance, alongside a set of terms that vary from lender to lender. Reading the fine print is always recommended, though it’s especially true here.
What can property development finance achieve?
Answering this question goes hand-in-hand with the question of why seek property development finance in the first place. If the applications are limited, then the reasons to take out a loan are just as limited.
The uses of property development finance vary depending on how exactly you sourced your capital. Naturally, small loans with little wiggle-room will only be applicable to a small number of projects, with the reverse being true for bigger, more flexible loans. Therefore, it is important to identify the boundaries of your project first, before diving into the world of capital sourcing.
Take, for example, a project involving an entirely new build from the ground up. Such a project can benefit hugely from property development finance, particularly so from a flexible form of financing, like the aforementioned bridging finance. This is equally true for conversion projects, large-scale renovations, or refurbishing derelict properties.
Property development finance can achieve success for smaller projects too. By sourcing capital through the previously mentioned means or through others, anything from minor refurbishments to small-scale property flipping can be effectively achieved. With enough research, property development finance can make the world of property development significantly easier to navigate, be that for commercial purposes, or residential ones.
Tackling property development finance for the first time
It should come as no surprise that property development finance can present unique hurdles for first-timers. Depending on your intended purposes, you will need to obtain particular documentation or types of loan, buy-to-let mortgages being one such example if you intend to let your property.
Acquiring the necessary capital in the first place can be a challenge, as your initial capital is likely quite limited. Enter the much-touted bridging finance once again. Though other forms of finance can be appropriate, bridging finance is an especially useful tool for first-time property developers, largely due to the aforementioned versatility. As bridging finance can be applied to a wide range of projects, and at short notice, they are often a good first port of call for beginner property developers.
Most of all though, research is key, for beginners and veterans alike. Knowing your market, abilities, and options is critical for success in property development, not just capital. Small, cheap renovations done at the right time can do wonders that larger projects done with poor timing cannot, regardless of the amount of money used. No matter your approach, be sure to do your due diligence.