Property development finance guide

Property Development Finance – Guide to Funding Development Projects

Funding a residential or commercial property development project with the right sort of property development finance is important as it can impact significantly on the availability of cash to support the initial investment, cash flow throughout the construction phase and ultimately the profitability of the development project itself.

Many aspiring investors dream of becoming successful property developers – taking their own development project and design ideas from the drawing board and making them a reality, and more importantly generating lots of profit in the process.

Financing your Development Project

However, one of the biggest hurdles to be overcome when it comes to property development tends to be right at the beginning of the process, and that’s having the finances in place to make it all happen.

Generating the correct levels of finance to launch such an investment project can prove problematic for many novice developers new to the property development game.

One the flip-side however, is often relatively straight-forward for those who have developed property before and have a good track record in successfully completing such projects.

They also have the benefit of being able to call-on the cash reserves generated from those previous developments to get them started on a new project, but for investors new to this game, it can be tricky.

Sources of Property Development Finance

So what property development finance options are there to help new and aspiring property developers generate cash to start developing?

Personal Savings

First of all, if you are lucky enough to have significant savings that will stretch to getting your development project off the ground, then cash from your savings should be your first port of call.

Re-Mortgaging

Unfortunately however, having such personal cash reserves is very rare, so property investors often need look at alternative sources of funding, with the most common route being a re-mortgage on an existing property.

A re-mortgage however should only be considered after extensive research, property valuations and detailed project appraisals have been completed.

Re-mortgaging is usually an option open only to property investors who have built up a considerable amount of equity in their home or other property through historic gains in capital values.

A re-mortgage will help by allowing an existing home-owner with substantial equity remaining in their property to use it for alternative purposes – property development for instance.

However, we would strongly recommend that you seek professional advice before pursuing this option. Stability is the key… don’t push your luck.

Further Advance

Another alternative open to you if re-mortgaging isn’t a viable option, again involving liaising with your mortgage lender, is to look into the “further advance” option.

The further advance option is exactly what is sounds like – it is where you can ask for an advance from your lender.

You should also be aware however, that this kind of financial advance could be one of the most expensive ways for you to generate property development finance as it will usually be offered to you on a standard variable mortgage rate, which is often not the most cost effective form of finance available.

Choosing a Mortgage to Finance your Property Development

Always bear in mind when choosing a mortgage for a property development project, that you will need to be selective about which finance package you choose.

It is not viable for instance to opt for a traditional mortgage that would be offered to an owner-occupier.

Why? Because these mortgages traditionally come with a 25-year term which is not ideal if you plan on selling your development as soon as it is finished.

With this in mind, you should look into a mortgage package that has no early redemption penalties – possibly a tracker or flexible mortgage facility.

This kind of mortgage could be ideal because, as a property developer you would not face additional lending charges if things went very well and you decided to pay back some of your loan in advance.

Joint Venture Development Finance

Another alternative for many property developers struggling to raise sufficient project finance is a strategic joint venture with an experienced, well-funded development partner.

This can often be an excellent route to take to turn a development project in to a reality.

A good joint venture partner will normally bring project funding, experience and essential network contacts to a project in return for a share of the profits on completion.

Residential or Commercial Property Development?

Another factor that will affect how you raise the development finance to kick-start your project will be what kind of property you are looking to develop; as residential and commercial properties have different options when it comes to start-up funding.

Residential & Buy-to-Let Property Finance

For instance, if you plan on renting out a residential property, one of your best options would be to opt for a buy-to-let mortgage.

Buy-to-let mortgages are calculated and offered on the basis of their income generating potential from rental receipts rather than on the developer’s salary or monthly income.

Residential developments consist of leasehold flats, flats above shops, land and building plots for self builds, flying freeholds and leaseholders acquiring or extending their freeholds.

Commercial Property Development Finance

When it comes to developing commercial property, however, your tactics have to be different.

This is because developing commercial property and generating funding for such a venture is deemed to be harder, riskier and more expensive.

Like most things, if you are a reputable property developer with a good track record of successful projects, property finance lenders are much more likely to offer funding, but if you are a newcomer with little or no history then it may be more difficult.

Even so, you should not be downbeat as there are still options available to you.

A well thought out, strong business plan backed by sound financial appraisals, good designs from an architect with plenty of detail, realistic programmes for the work, valid planning permissions etc. will all help to reduce the perceived financial risks for your property development finance provider and will certainly improve your prospects of securing the funding you need.

Properties that fit under the commercial property umbrella include development land and agricultural land; industrial property, retail property, offices and hotels to name but a few.

Detailed Research & Investment Appraisals

Finally, it is very important to remember that no property development venture should be undertaken lightly.

Developing property can be a great route to financial and business success, however, if it’s not executed correctly, without careful research, planning and due diligence it can lead to increased financial pressures and possible financial collapse, so always approach with caution and do your homework thoroughly.

Specialist Property Investment & Development Finance Solutions

As a leading independent property investment specialists Investment Property Partners offer expert advice and support to clients across our specialist areas of expertise helping them to achieve their investment objectives.

If you are searching for land, development sites or property development finance solutions please contact us today to discuss how Investment Property Partners can help you.

Further reading…

More information about property and land development… here