Property development finance like a bridging loan differs from traditional mortgages, as such offers generally involve a short-term loan. The first part provides funds to purchase the site, with many lenders advancing a percentage of the purchase price, with the buyer funding the rest of the cost. The loan-to-value ratio varies between lenders, so it is a good idea to work with a specialist in the property development lending market to ensure that you explore the best options within the various investment vehicles and deal structures that may be available.
Borrowing money to develop property with a bridging loan can be a great way to increase your income, expand your business, and increase your net worth. It could also be a riskier option, as you have to pay back the loan plus interest. However, if you borrow money to develop property, you could potentially make more money than you would have made if you had kept the property as-is. You will likely also increase the value of the property, creating a long-term asset that could generate passive income. Additionally, borrowing money to develop property can be a great way to diversify your portfolio and provide you with more profit from that property.
Among the ways that you can profit from your property development investment are:
- Buy and Hold: Buy a property and rent it out for income and capital appreciation.
- Fix and Flip: Buy a rundown property, renovate it and resell it for a profit.
- Develop Subdivisions: Purchase land and subdivide it into smaller lots and then sell them off.
- Build and Sell: Purchase land, construct a building or home, and then sell it.
- Lease Options: Offer a tenant an option to purchase the property at a later date.
- Joint Ventures: Partner with another investor to share the costs and risks of a real estate project.
- Land Banking: Buy undeveloped land for the purpose of holding it for a future development.
- Self-Storage: Develop a self-storage facility to generate passive income.
- Commercial Property: Buy and/or develop commercial properties such as offices, retail stores or warehouses.
- Vacation Rentals: Buy and/or develop a vacation rental property to generate income from short-term rentals.
Maximizing Profit!
The profit that you can make from property development can vary hugely, but there are certain factors to keep in mind that make profit much more likely.
You may well have heard the phrase ‘location, location, location’, and it’s a great phrase to keep in mind when buying and developing property. The better that area is (so the best part of the town or city, and with great transport links and schools etc) the more you are likely to be able to sell that property for. So it pays greatly to research this thoroughly.
The other large factor on profit is the price that you pay for the property. So, it’s very much worth attending property auctions and being very careful with your bidding, so that you can secure that bargain property that you need in order to get that great profit.
Then of course if you are handy and can carry out some of the work on the property yourself, then you are also going to save a lot of money there.
There are several easy-to-do projects that you can could complete yourself, such as:
- Paint: A fresh coat of paint can do wonders for the look and feel of a property. It’s relatively inexpensive, and it’s an easy way to give your property a fresh look.
- Add Curb Appeal: A well-manicured lawn, colourful flowers, and a few outdoor decorations can make a big difference to the appearance of the property.
- Update Fixtures: Updating outdated fixtures, such as door handles, light fixtures, and window treatments, can help give the property a more modern look.
- Make Repairs: Fixing any problems or damage to the property, such as cracked walls, broken appliances, or leaky pipes, is important for getting a good sale price.
- Increase Lighting: Adding more lighting to dark areas of the property, such as hallways, basements, and closets, can help make the space feel brighter and more inviting.
- Upgrade Appliances: Installing newer, more efficient appliances, such as a high-efficiency dishwasher, can help reduce energy costs and improve the look and feel of the property.
So, some simple fixes and improvements can have a big effect on the curb-appeal of a property, and so the price that a buyer is willing to pay for it.
Finance for Building!
The second part of a property development loan is often offered in full, as this is the finance to build the project. It is most likely to be provided in stages, whereby on completion, the lender will certify the work and release funds to pay the suppliers. You may require sufficient cash flow to fund the initial stages and meet contractual obligations until the loan funds are released, which is something you need to factor into your borrowing plans.
Finding the Right Option for Your Needs!
Many of the most favourable property loans are arranged through market-leading senior debt and competitive equity specialist plans, with many options not available through high street lenders or without the support of a specialist high-finance brokerage with experts in bridging loan for property development finance.
There is a growing demand for flexible property development mortgages to fund new builds, refurbishments, conversions and land redevelopment. With initial funding likely based on projected valuations and business plans, however, the newfound flexible lending options are better able to meet the new opportunities presented by the changing marketplace and expected future growth.
Elements of Property Development Finance Explained!
Combining the different finance elements to varying term goals and incorporating a wide range of acceptable assets as security is fueling the possibilities in a growing market.
Purchase Finance
Lenders generally require a percentage of the purchase value to be put up by the investor. This ensures the investor is committed financially to the project and is more likely to focus on achieving success.
Project Finance
Lenders rarely advance the total project funding in one go. They stage the budget release to ensure that each stage is completed before releasing additional financing for the next step. This approach protects both the lender and the borrower’s overall financial exposure. This means that if a project fails, the financial risk is limited.
Flexible Development Finance!
UK high street banks have reduced their property development mortgage sector exposure. Whilst they still attract a high share of the traditional property development finance market, they are now being challenged by an opening up of private equity, private banks, and peer-to-peer lenders prepared to offer a variety of more flexible, competitive lending solutions.
This opening of finance development lending opportunities is giving rise to more tailored finance packages that better meet particular individual requirements more suited to today’s property market. The ability to access creative and more flexible finance solutions more suited to the various forms of loan security of today’s market can be much better for borrowers than the off-the-shelf deals more akin to traditional bank lending.
Independent Advice on Property Development Financing!
High net-worth individuals require both impartial and accurate advice to ensure that they explore the entire market, and to consider the range of options from both traditional and niche development finance providers. We touched on the benefits of independent advice, and the development of different emerging finance options makes this even more essential. An experienced high-value international finance broker will understand how to unlock capital for property financing and redevelopment to use an array of flexible finance options to mortgage and re-mortgage funding throughout the property development.
The Future of UK Development Finance!
We are now seeing a more significant specialist UK development finance sector, filling the void that the reduced UK bank exposure has opened up. There is little demand for development finance in Europe, allowing UK operators within the field to expand to working with European developers and investors, thus extending their expertise to overseas finance and their experience in property trends and markets around the globe.
When high street banks monopolized the short-term lending market, we saw interest rates between 10% and 15%. Since 2008 this changed; US subprime mortgages crashed and weakened balance sheets, which have led to mainstream lenders taking fewer risks.
The change now sees high street banks only prepared to expose themselves to 50% of the gross development value and interest rates. Although generally a little lower than specialist lenders, the sums available make them less viable for many property developers. Refusal to offer the higher 75% lending ratios that can be obtained from specialist lenders makes the marginally higher interest rates favourable. The timescales also see more business directed to specialist development finance companies, as they can make provisional offers within 48 hours, whereas high street banks take between six and eight weeks. Their flexibility allows for speedier decision-making and action-taking.
A range of investment options now allows for pre-planning developments and all the renovation and redevelopment opportunities up to large-scale property developments. With the UK government pushing for more affordable homes, and a current shortfall of new homes across the UK, there is now a demand from large and small-scale private property developers and housing associations to access property development finance. Finance that can be tailored to meet the needs of diverse projects and individual requirements.
What Lenders Want?
Basic elements are still important to lenders, even though the specialist UK development finance market is changing and moving fast. Traditional elements lenders review will include development experience, collateral, GDV and the quality of the contractors performing the work. Lenders also require a commitment from the investor, which lenders measure by the amount of personal capital committed to the project.
However, specialist brokers can advise on slightly different routes to development finance through specialist lenders and maximize the various strategies to determine affordability. Working out affordability by working back from viable exit routes to determine whether the original deal and returns are acceptable.
With property markets offering long-term rewards and a buoyancy that sees returns bounce back stronger, the growing flexibility in the UK property finance market is highly deal-oriented and liquid. Therefore, it is a lending market where individually tailored expertise is priceless.
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