20 Oct 2022
Whether you’re new to property development or are an expert this guide is designed to help you understand some of the different property-orientated finance options out there today.
Property development is a broad term that covers a range of projects.
One property developer may plan to renovate a property for a quick sale, whereas another’s ambition might be to build a mixed purpose development from scratch.
Ultimately, the goal is to make a return on investment. Here are some of the key terms:
Flipping – when a property is sold at a higher price shortly after it’s been bought. Property flipping requires quick access to funds.
Refurbishment – when the property developer purchases a property and refurbishes it with the intention of selling it for a profit.
Conversion – a process that involves converting a house into flats or an office into residential accommodation, for example.
Ground-up development – singular or multiple homes, offices or mixed-use properties that are built from scratch.
Property development finance is an umbrella term for the business finance that you, as a property developer, can use to fund your residential, commercial or mixed-use projects.
Accessing the right funding type for your needs can play a key role when it comes to making a profit. Some of the main types of property finance that we’ll explore in more detail are:
Second charge loans
Residential development finance
Regulated development finance
To work out which type of finance you need and how much, you need to consider how long the project will take, how extensive the work will be and how much it’ll cost in different scenarios.
Here are some aspects that could help strengthen a funding application:
Planning permission details
Schedule of works
Property development team
Gross development value (GDV)
Commercial mortgages fund the purchase of non-residential properties, such as shops, warehouses and offices. Like their residential counterparts, the repayments are usually spread over a number of years. Terms can vary from three to 25 years.
Deposits for commercial mortgages are usually around 30% of the value of the property. Part-commercial mortgages are a unique mortgage product for properties that are part commercial and part residential, such as flats above a pub.
Bridge loans are named as such because they’re designed to ‘bridge’ a gap in a property developers’ finance. They’re also referred to as ‘bridging loans’ and ‘bridging finance’.
(It’s worth mentioning that bridge finance can be used by other types of businesses too.)
As a property developer, you could use a bridge loan to purchase a property while you wait to receive the cash from the sale of an existing property. Bridging finance can also be used to buy a property at auction, pay for renovations and buy land for property development.
Mezzanine finance combines debt and equity financing for the purpose of funding large projects. For security, the finance provider will usually take a second charge over the the property you’re developing.
Mezzanine finance can help plug the gap between your available deposit funding and the loan available from the senior lender, acting as a finance solution for a deposit shortfall, or enabling you to retain cash for other property deals.
A second charge loan or mortgage can enable you to leverage equity from a commercial property as security against another loan. Bear in mind that you’ll usually have to pay off your first mortgage’s repayments before paying back the second charge loan.
Auction finance is designed for property developers who want to buy a property at a discounted price at auction.
If your bid is successful, you’ll typically have just 28 days to pay the money; as such, quick access to the right funing is paramount, and that’s where auction finance comes in. Auction finance is usually fast to obtain, and you could get the cash within a week.
As a property developer, some lenders may be willing to provide you with finance before the auction takes place so that you can attend with ‘agreement in principle’.
Residential development finance can be used to finance the building of a residential building or to fund the conversion of a commercial building into a residential one.
From a single home to hundreds, it can be used to fund small and large property development projects. As with other types of finance, costs can vary, so be sure to work out the total cost of the loan when making a decision.
Generally speaking, development finance is regulated if 40% or more of the property being built is used as or linked with a main residence dwelling.
It’s typically used to fund the purchase of land on which to build a new home for the borrower, or to build a new home in the backyard of their existing home.
Whether you’re purchasing your company’s rented premises or growing your portfolio, having access to the right funding is key.
At Funding Options, we break down funding barriers with a simple application process that empowers you. Our technology, Funding Cloud, accurately validates your business profile, matching you to the industry’s largest lender network.
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