Guide to funding property development projects

Property development is a very wide sphere and there’s no one step plan for how to fund all development. So much depends on the individual project and the aim for the finished property. So whilst it’s essential to do as much research as possible, do bear in mind that it needs to be kept relevant to what you have in mind.

The first deciding factor as to which route you go down is whether you are looking at a commercial or residential venture. Different types of finance are better for each and getting the right sort is imperative because it will impact directly on cash flow through the construction phase, the availability of funds upfront and ultimately affect the profitability of the project itself.

Financing

This is one of – if not the - biggest challenges there are when starting on a new development plan. You need to have enough cash to make it all happen, it’s as simple as that. You need to have the money to get your project done as well as ensure that you’re covering your own personal costs whilst it’s all going on. So ensure that you have the correct level of finance, especially if you’re new to this game. For experienced property developers getting the finance sorted is usually quite a straightforward matter because lenders are very fond of previous proven successes as it means far less of a risk to them and all of some of the previous profits can be invested upfront. If you’re a novice however, it can be tricky getting the financial backing into place and you need to have a solid plan for doing so.

Potential cash sources

 Think carefully about which of these is practicable and sensible.

1. Personal savings should be your first port of call if possible. There are comparatively few people for whom this is a possibility, however, so alternative sources will probably need to be sought.
2. Re-mortgaging an existing property. In reality this is really only an option for property developers who have a decent amount of equity to throw at the project.
3. If re-mortgaging won’t work, a further advance might be possible. This is exactly what it sounds like – an advance of cash from the lender. However, this is usually an expensive option offered on a standard variable mortgage rate so it really isn’t cost effective.

There’s a lot to consider, and you don’t want to make any mistakes, so getting advice from the professionals is high recommended if you’re at all uncertain.

Choosing a mortgage for finance

This is obviously tried and tested solution to a financing issue – but only if you are selective about your finance package. Make sure it’s suitable for your needs or you could end up paying out far more than necessary. Don’t apply for a traditional mortgage that an owner/occupier would get because they usually come with a 25 year term which isn’t viable if your plan is to sell the development ASAP once it’s finished. Buy-to-let mortgages are generally more flexible and you should be able to find one at the right rate, from the right lender which suits your project.

With a tracker/flexible mortgage facility there shouldn’t be any early redemption penalties. This could well be a good choice for property development because there are no extra lending charges and if everything goes to plan and you have the funds to be able to do so, you can pay back some/all of the loan early without being penalised.

Joint venture developer finance

If you’re finding it a bit difficult to secure finance on your own, you have the option to bring a more experienced developer on board. Being highly experienced and well-funded are both prerequisites for this role and it’s an excellent way of helping to convert your aspirations into reality.

Your venture partner should bring: solid experience, generous funding and a very useful, trustworthy network of contacts to help bring your project to fruition. In return you would give them a share of the profits in the completed development. If you can find the right person to bring on board, this route can be a very easy and lucrative way to get things going. It makes a difference whether it’s residential or commercial because there are different options for each when it comes to start-up funding.

Buy-to-let and residential property finance

If letting property is your aim, then it’s a really good, reliable option to choose a buy-to-let mortgage. As a bonus it doesn’t take into account the developer’s monthly income or salary so there’s no risk so far as that is concerned, the basis of the potential or projected income is taken from rental receipts.

Residential property can be categorised as:

• Flats above shops
• Leasehold flats
• Leaseholders extending or acquiring their leaseholds
• Building plots for self-build

Commercial property development finance

A different approach is needed for this type of venture because commercial property is inherently riskier, harder and it’s more expensive to develop. Naturally, if the developer has proven success with previous projects then the development finance lenders are more likely to look more favourably upon them. But as always, if you’re coming to this as a novice then securing finance is going to be a lot harder.

However, happily there are still options as long as you have the following things in place:

• A very strong, well thought out and strategic business plan
• Very high standard designs from a reputable architect containing as much detail as possible; don’t leave anything to chance
• Good financial appraisals
• Planning permission already obtained if relevant
• Realistic timeframes
• Realistic projected costs

All of the above all help to reduce any potential risks for the lenders and have a positive effect on your chances of obtaining finance.

Commercial property can be categorised as:

• Hotels
• Offices
• Agricultural and development land
• Retail property
• Industrial property

Property development is not something to be taken lightly, but as long as you’ve done your due diligence, thoroughly researched your intended market and have a good, solid business plan then there is a lot of potential for both business and financial success as well as advancing your property development career.