Are you having a hard time planning for your next finance project? Property finance is indeed complex, even for professionals. But don’t worry because you can look through our guide to help you with a few things you need to consider.
What is property development finance?
Property development finance is a type of business finance that covers loans, mortgages, and even personal loans for building residential and commercial properties and refurbishing/development projects. This type of finance usually is used for large-scale projects but may also be used for short-term projects.
When to start financing for a development project?
First, you should understand what path you want to take. Do you want to develop a commercial or residential building? How extensive will the project be, light or ground-up refurbishment?
By knowing this, you can start looking into the types of development loans that would be most suitable for your business before you go ahead and get a loan for developments to fund your project.
How big will the development project be?
There are three major categories to determine what type of finance you need. This development project is:
- Light refurbishment, which focuses on small and general aesthetic changes like floor, ceiling, and wall work.
- Heavy renovation covers structural changes like internal walls and electrical works, adding internal and external changes.
- Ground-up development, the type of property project wherein you start with an empty lot with nothing at all or a significant refurbishment with nothing but the brickwork.
These developments usually require a large amount of capital to fund them, which can be quite costly if you do not have adequate experience or financial muscle.
Risks involved with property development
As with any other investment, there is profit and risk involved when investing in property development. Investing in properties is risky because the investment can be illiquid or non-existent if things go wrong.
Investing in new property as a means of expanding your business can be risky as well because you need to ensure that all the costs involved in a property acquisition are covered.
The high potential for profit from property investment is what makes it so attractive to many people. But for this opportunity to bear any benefits, businesses need to have the means available to be able to do it successfully.
For example, if you are a relatively new or small business without a large amount of capital, you might have some trouble acquiring new property. However, it is still possible for you to raise the capital you need to start acquiring or developing a property through development loans.
What type of development loan should I get?
Once you’ve ascertained how big your project will be, you can start looking into development loans available for you to use. Below are the most often loans acquired.
Bridging Finance
This type of loan covers short-term development projects. A vital advantage of this loan is that you can borrow money immediately and pay for it in a short amount of time with enough finance for refurbishments.
Commercial mortgages
Commercial mortgages are loans used for buying commercial buildings like shops, offices, and warehouses. Developers commonly use commercial mortgages with existing businesses that want to buy their premises.
Auction Finance
Experienced developers commonly use this short-term finance, but first-time developers can also purchase a property through auctions. The most significant benefit of auction finance is that they will pay you immediately after the event.
How can you avoid getting a bad deal?
There are a number of financial institutions and lenders that offer loans to borrowers who want to purchase or develop a property. Some of them offer competitive pricing and flexible terms, but it is nonetheless important for potential borrowers to do their research before they choose the lender that is right for them. This will give them a better idea about the options that are available as well as which lenders have the most favorable conditions.
Conclusion
In general, to take the first step to finance your development project, you have to consider these three points: (1) project assessment for how large the scale of the project will be; (2) timeframe to which you will complete the project; and (3) how much the entire project will cost.
Property Development Finance is complicated as it is. However, as long as you consider those three key points, it will be more accessible. Do extensive research to make sure everything is in place.
