Whether you intend to develop an existing property development enterprise, or you wish to break into the market as a small-scale beginner, you will know the capital required to fund these ventures. Given the capital requirement, particularly for large-scale projects, you may be investigating your options when it comes to property development finance.
Depending on your proficiency in property development, you may be feeling overwhelmed by the complexity of the subject. Our guide aims to be useful to seasoned property developers, while still being concise and digestible to beginners. Let’s take a look at how you can make use of property development finance.
What is property development finance?
Property development finance is a form of finance that specifically aims to satisfy the capital needs of property developers. It is a form of business finance, one that can be used to fund the development of residential, commercial, or any other building. As such, property development finance is not a specific type of loan, but rather an umbrella term. This term refers to loans that aim to provide property developers with capital, including bridging loans, personal loans, and auction finance.
Given the wide range of finance options available, property development finance can be used for an equally wide array of projects. Some opt to use property development finance to fund interior decoration, others to fund entirely new builds. The only limits are viability and your imagination.
Tips for first-time users of property development finance
It is always important to be thorough when using property development finance. But, for first-time users, it is crucial to be diligent. Considering the variety of property development loans, your first port of call should be to determine which is best for you. For example, bridging loans are particularly useful for people looking to buy a property, but haven’t finalised the sale of a previous one. Where normally this break in the chain would stymie a purchase, bridging finance helps you avoid the opportunity falling through your fingers.
Once you have decided upon the most suitable loan, your next step is to do some market research. In the real estate business, it’s advised to research properties you intend to purchase, to avoid wasted investment. A similar rule applies when using property development finance; you must have a firm idea of what the funds will be used for, both to make a successful application and to avoid wasting money.
If you intend to commence with a large-scale project, such as a new build, you’ll need to prepare some of the funding yourself. There are forms of property development finance that are geared toward large projects. However, they do not provide the full amount. Usually, this amounts to the cost of the land, and roughly 80% of the construction cost of the project will be provided, with the rest of the capital being supplied by the developers.
Property development finance for private property
Although most property development finance options have a commercial focus, there are options for developers of private projects. For such projects, there are a variety of private lenders that can provide funding. This allows private individuals or developers of residential properties to raise capital for their projects.
As the projects are for private use, rather than commercial, you may have to meet a stricter set of requirements than you would otherwise. Depending on your lender, you may have to provide a thorough plan for what will be done to and with the property, while others will demand a strong credit rating. Assuming you have done your research and have planned your project diligently, you should meet any requirements asked of you.
How are the funds provided?
One important aspect to know is how the money will be distributed. Normally, you won’t receive everything at once. First, you must be able to provide your portion of the capital. This might be the capital required to purchase the land, initial supply costs, or something else you will have agreed with your lender. Once the project is underway, you will receive a regular supply throughout the duration of the project. These intervals, along with the uses for the money, will have been upon agreed before the project began.
Applications of property development finance
Property development finance can facilitate almost any project imaginable. The main potential obstacle is in matching a project with an appropriate form of finance. Let’s consider the three main categories for property development projects.
Aesthetic refurbishments
This is the smallest category of property development projects. It covers projects that focus on aesthetic changes and minor changes to a property overall. This typically avoids structural changes, and instead focuses on interior design aspects such as flooring and furnishing.
Renovations
This category is the most commonly thought of type when considering property development. It involves making major changes to a property. Both of a structural and aesthetic nature, in addition to constructing extensions to the property. Projects in this category can be resource and time-intensive, but not to the degree of the next category.
New builds
The final category covers building properties from scratch. This typically involves the purchase of a plot of land. With the construction of a building or buildings following soon after. This category can also apply to the tearing down and rebuilding of derelict buildings, where renovation isn’t enough to restore the property. Massive refurbishments also fit the category, where the project is more akin to a rebuild than a refurbishment. Naturally, this is the most intensive type of development project, as there is little existing to work with.
Conclusion
An awful lot goes into property development and the raising of capital for development projects. While it may seem daunting at first, a good rule of thumb is to consider the depth and intensity of a project. Conduct thorough research and planning, then apply for a loan that best suits the project. For example, a minor renovation isn’t likely to benefit from a bridging loan, but the swift purchase of a useful property might.
Regardless of your project, the path to success lies in planning. Planning will secure your loan, supply your project with necessary materials, and execute the project with few impediments. If you plan, and plan well, your property portfolio will reap the rewards.