Successful property developers are by their nature good planners and this talent is one that should be put to use when sourcing property development loans.
Before considering what type of property development loan is required, the nature of the development project needs careful consideration. Property developers should ask themselves; How extensive is the development project?
How extensive is the development project
The extent of the development can usually be classified as either refurbishment or development. Refurbishment projects tend to only deal with the aesthetics, with some minor work to floors, walls and ceilings. Refurbishment projects do not tend to include structural work.
Development projects tend to involve moving walls and updating or installing electrics and plumbing. Development projects may possibly include partial demolition and rebuilding of the property and they may also include adding extensions, adding external walls or complete conversion from a single dwelling to a HMO (House in Multiple Occupation), for the rental market.
Considering the extent of the development will largely help answer how much will it cost and how long will it take. Consider what the best and worst case scenarios are and this will set you onto the right route of acquiring the appropriate finance.
Following the European debt crisis of 2012, banks and high street lenders have become less willing to lend and even when they do it may take weeks to underwrite the loan and complete the transaction. Lending will be dependent upon the borrower’s financial status and a large deposit of 25% is normally required.
Due to these market changes, developers should use more appropriate routes of financing that have in fact been developed for purpose:
- First charge bridging loans – Bridging loans are short-term loans that can be arranged within a few days and because of this they allow developers to move quickly as well as being the ideal solution for buying property at auctions. Loans can be underwritten against collateral, such as that of the property, or for experienced developers and landlords, against other properties in their portfolio. The exit strategy should always be considered and for most developers this means being able to buy, renovate and resell the property prior to the loan expiring.
- Second charge bridging loans – This type of development loan can be used to increase the developer’s cash flow. This funding can then be used to complete a stalled project or to buy the next project prior to reselling or completing the first.
- Joint venture investors – Joint venture investors can be used when financing through other routes isn’t available and it can be a good choice for first-time developers. Companies like Glenn Armstrong Property offer financing through joint venture investors, who then make a return through a profit share agreement. These agreements can be created to include an element of mentoring to ensure that the project is a success.
Borrowers should also be aware that property development loans will have higher interest rates compared to standard mortgages. Standard mortgages do however have early exit penalties which tend to make bridging loans and joint ventures more cost effective overall.