Property development finance is a type of funding used to finance the construction, conversion or heavy refurbishment of buildings. The loan is usually set up as a short-term loan to fund the project only during the build.
Once the project has been built out, the loan is usually repaid through the sale of the property, or refinance to a residential, commercial or buy to let mortgage.
The terms ‘development finance’, ‘property development finance’ and ‘property development loans’ are used interchangeably, and all represent the same type of borrowing.
In its simplest form, development finance is a loan that’s specifically designed to finance the development of properties. Now, this could be anything from a single house to a whole block of apartments. The UK property market is a bustling hive of activity, and development finance is a key tool in keeping things moving.
Here’s how it works. A borrower, that’s you, approaches Business Finance Expert with a proposal for a property development project. This could be a renovation, a green development project, or even a new build site. We will then assess the proposal, taking into account factors like the potential value of the completed project, the borrower’s credit history, and the estimated costs of development.
We’ll then create a detailed funding application and present this to lenders to obtain you a choice of lending options. Once the lender gives the green light, the funds are released in stages, not all at once. This is typically tied to key stages of the development process, such as when the foundations are built and the completion of the foundation or the roof.
This way, the lender can keep a close eye on the progress and ensure that the funds are being used appropriately.
Take on larger projects – By taking out this type of loan, you can put far less money into a project. It’s not uncommon to only put in 10% of the cost of the project, borrowing 90% loan to cost. This means your savings don’t all have to be put into the project. This has two benefits:
You can use those funds elsewhere as other opportunities arise.
You are far less committed to the project financially. Generally, it’s never considered to be a good thing when all your eggs are in one basket, so diversification is key. Protect your savings by financing your developments.
Increase your return on investment – Property development increases your return on investment. By putting far less money into the project and only reducing the profit a small amount, you will be getting a far greater return per £ invested.
Leveraging business transactions has long been used to get the best possible return on investment and it’s no different here. You can make your money work much harder for you by taking out property development funding. Taking out finance allows you to increase your return on capital employed (ROCE) and may allow you to tackle more than one development project at once.
So, is property development financing a good idea? Well, that depends. If you’re an experienced developer with a solid plan and a clear understanding of the risks involved, then yes, it can be a fantastic tool to help you bring your property development dreams to life. But remember, it’s not a decision to be taken lightly. It’s important to do your homework, understand the ins and outs of development finance, and consider all the potential risks and rewards. After all, property development is a big undertaking, but with the right planning and the right finance for your development, it can also be a big opportunity.
Of course, inexperienced developers have to start somewhere, and it can still be a good idea for them too. That said, it’s important to start at a manageable size and where possible, work with an experienced team.
So, you’re thinking about taking the plunge and securing a property development loan? That’s great! But before you dive in headfirst, there are a few key considerations to keep in mind. Let’s take a look, shall we?
First things first, you need to take a good, hard look at your financial situation. This includes your credit history, current income, and existing debts. Lenders will scrutinize these factors closely, so it’s best to get your ducks in a row before you apply.
Next up is the property itself. What’s its current state? What’s the potential for development? Is it a green development project or a renovation? These are all questions you’ll need to answer.
Don’t forget about the cost of development. This includes everything from construction costs to fees and interest payments. It’s crucial to have a clear understanding of these costs to ensure your project is financially viable.
Lastly, you’ll need to consider the property market. What’s the demand like for properties in your area? What’s the potential for profit once the development is complete? A bit of market research can go a long way in ensuring the success of your project.
Now, you might be thinking, “Development finance sounds great, but are there any other options?” Well, you’re in luck! There are indeed several alternatives. Let’s take a quick look at the options.
Remember, the best funding option to finance your development will depend on your individual circumstances and the specifics of your development project.
It’s always a good idea to seek professional advice before making a decision. After all, property development is a big undertaking, but with the right planning and the right financing, it can also be a big opportunity.
These are short-term loans designed to bridge the gap between the purchase of a new property and the sale of an existing one.
Bridging can be a great option if you need funds quickly, but keep in mind that they typically come with higher interest rates.
If you’re planning to rent out the property after development, a buy-to-let mortgage could be a good fit.
These loans are specifically designed to support landlords and property investors.
Planning to buy a property at auction? Auction finance could be the answer. It’s a type of short-term loan that allows you to secure a property quickly, often within as little as 28 days.
It is essentially a form of bridging that allows you to purchase property quickly, before doing work on it and selling it without taking out a mortgage.
Last but not least, you could consider using your personal savings or seeking investment from private investors to finance your development.
This can be a good option if you have a strong network and are confident in your ability to deliver a successful development project.