How to Finance Property Development?

How to Finance Property Development?

Property investors dream of investing in big projects that will give them good returns in future. Property developers usually finance new building projects or renovations of the old building. They can build up luxury homes, convert offices to flats, or develop a commercial building. However, investing in property development projects require a huge amount of money. Finding ways to finance this money can be a challenge.

There are many financing options available. Property development loans are available if you would like to invest in the UK market.  Property business is highly rewarding. It can give you consistent income and you can live without financial stress when you retire. According to a market research, the house prices in the UK have increased more than any other European countries since 1988. On average, the house price increases by 12.3% every year. This upward trend of the property market indicates that investing in UK property market is a wise decision.

Another reason to invest in this market is that there is a huge demand. The Office of National Statistics has declared that by 2025, there will be a shortfall of 1 million housing in the UK. That means that investing in the property market now can give you huge returns in the future and there is a huge opportunity for business growth in future.

How to Finance?

The interest rates have been low for the past six years, so it getting a loan will be cheaper. The mortgage payments are the lowest currently, so if you invest money in this market now you will be able to get good returns. You can rent out the property and enjoy high rental income every month. It is the right time to invest in residential and commercial properties because you will have good rental potential and prospect for a higher property value.

In order to invest money in property development, it is necessary to have sufficient fund. The available fund should cover the in initial investment and the cash flow. The type of funding depends on the scope and scale of the project. For example, if you are doing only light refurbishment then short-term loans will be a good option.  For heavy renovation, you need to go for long-term bridging finance. You can apply for short-term commercial loans as well. To build a property from scratch, you might need to think of several funding options.

Types of Finance

You should choose a finance option according to the need of your property development project. Here we are going to discuss some of the types of finance available for your project.

Personal Savings

If you have significant savings, then you may not need to look out for loans. You can use your cash to buy the property. This is the best option as you won’t incur any interest and won’t have to go through the complex process of borrowing.

Re-Mortgaging

You can apply for a re-mortgage on your existing property if you don’t have enough savings. You will need to do thorough property valuations and do extensive research before applying for re-mortgage. If you have a good amount of equity in your existing property, then this is a good option for you.

Further Advance

You can ask for an advance from your lender. But you will get a standard variable mortgage rate and so this type of lending can be expensive. You need to discuss with a professional before applying for such loan.

Commercial Mortgages

You can use this option for buying shops or offices. This type of mortgage is similar to the mortgage you get for buying houses. The loan amount is spread over a number of years. This type of loan is usually taken by existing businesses when they want to own their own premises. You can also get this loan for a startup business.

Auction Finance

This type of financing is for those who want to buy auctioned property. After you have bid for a property at an auction and have won it, you need to pay the pay within 28 days. Auction finance gives you money within a short time so that you can pay the bid amount within the allocated time frame.

Bridging Finance

This type of finance bridges the gap between buying a property and looking for a permanent finance option. These are short-term loans, but you can get these loans very quickly. So, if you are thinking of buying a property at an auction and then selling it, you can apply for this type of funding.

Joint Venture Development Finance

If you are struggling to find money to finance your project then you can get into a strategic joint venture with someone who is more experienced in the field. It will increase your chance of getting a loan and you will have less risk in your project as you will be working with someone experienced.

How to apply for property development finance?

Before you apply for a property development loan, you must ensure that your project is well thought out. Your project must be feasible. Before the lender accepts your application, they will look how experienced you are in this field. So, you must show your previous work records. The lender wants to see that your project will generate income in future. So, you should calculate your rental yield. So, the amount you need to borrow depends on how much you need to purchase or renovate a property. But the loan rate depends on your property yield.

The Gross Development Value (GDV) is another factor you should consider in your loan application. This value indicates whether it is worth to give loan for your project. Usually, lenders give 65% of GDV as a loan. The lender will look at your ability to repay the loan. They won’t give loan for a risky project. So, you need to have a good track record in this field and establish a good reputation in order to obtain property development finance. Generally, you will be able to lend 70% to 80% of the total cost of the project.

You may need to apply for different types of loans to finance different stages of your project. Some of these loans will be short-term loans and the others long-term loans. Property development is a very complicated field. Finding the right funding source takes time. You need to plan ahead so that you can get the right type of finance for your project.