What is Property Development?
Property development is known to be one of the best ways to grow your personal investments. Yet the majority of people hang back and don’t move forward with investing in property development projects because they worry they will do it wrong. Most people think since they don’t have the development finance for the project, they can’t take it on.
They couldn’t be further from the truth. There’s no getting around the fact that investing in property is a lucrative and financially rewarding way to grow your wealth if you know what you’re doing. Read on if you want to discover how to secure a loan for property development by following the five simple and straightforward steps listed below.
Property development as an investment is when you plan on buying and either renting out a property or selling the property to generate income. Some people buy a property, fix it up and sell it, which is called flipping a house. Basically, property development strategies for increasing or generating income require you to determine if you have short-term or long-term goals as a property developer.
If your property development project consists of a short-term financial goal, you may be more interested in buying and renovating property for a quick sale and turnover. This type of property investment allows you to pocket any profit you make off the property. When you are interested in growing your income over some time, then you have a long-term financial goal and objective.
Any capital growth or return yields your development properties brings you is given to you through the commercial rent you charge for a home or business property. You set that rent based on your location and the work you’ve done to renovate or build a property out.
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Property Development Finance
Property development finance is more complicated when you purchase a house or property for capital growth and investment yield. Property development finance for investment purposes means you need to have the funds advanced upfront and then be able to use them throughout any of the property’s build or renovations. The funds you receive for property development are usually advanced against the value of the property and location site you selected.
Many lenders are willing to give you 60-65% of any value the property has, but sometimes you have to find the rest of the money needed yourself. There are times that once you start building out or renovating a property, you’ll be able to receive further funds from a lender that releases funding at regular intervals that you can use on your property’s build-out. In the end, some lenders advance you up to 100% of the build-out costs if you allow the site to be re-inspected by the lender representative or a monitoring surveyor.
How to Become a Property Developer
To receive the best results, you need to maintain high-quality standards in the development of a property. You also need to have selected a prime location that has sufficient value. If you do that, when you reach various stages in the property’s build-out or renovation, the lender will keep releasing additional loan funds.
The ongoing financial process includes a lender giving you a staged draw-down loan with re-inspection performed each time until the property development project is completed.
The Steps to Secure Property Development Finance
The step-by-step guide below will help you learn how to secure a property development loan for your first investment property. The steps listed below may help you obtain your 100th property development loan but receive better financial terms. The below guide will help you put together a winning process of what’s needed in each step.
#1 Location is the Key When Determining Buy to Let or Buy to Sell
Once you find your location, you need to determine if this is an investment property that can give you capital growth or a healthy return yield. Depending on where your property is, you have to figure out if you want to buy the property and let it out or buy the property and flip it with a profitable sale. When you buy to let you use the rent you charge to pay off the property’s mortgage.
You want to charge enough rent to give yourself a little bit of profit every month for the incidentals. When you’re buying to flip or sell the property. your strategy needs to include upgrading the property. If you want to sell the property for a profit, you need to have made the necessary renovations and upgrades, which will help you achieve the sale price you want.
#2 Secure Your Loan
It’s at this step you want to get information on how the lender retains the property’s interest. Do they draw-down at each stage? If they do, will that mean you’ll have no monthly payments to make?
Most of the time, when the development property has finalised its build-out or renovations, the loan becomes a financial payable account by the lender. That’s when the lender redeems their loan along with whatever interest you owe on the financing loan. Ensuring there are no monthly payments until the property development project is complete eases the financial worries for the lender and borrower.
#3 Negotiating Loan Interest Rate
The interest rate you’ll pay on your loan will be determined after the lender evaluates several different variables. Some of the variables include; but are not limited to:
- Who is your developer, and what is their property build-out or renovation track record?
- Where is the location of the property, and is it a location that has growing value with its properties?
- How much funding is needed?
- What is the loan to value ratio? There is a GDV, and that needs to be determined before the loan’s interest rate.
In general, most loans of over £500,000 or above have an interest rate somewhere between 4%-9% per year. Smaller loans for properties that are less than £500,000 are usually given an interest rate of 9%-12% per annum. But if the details of your property and location are of high value, you can pay as little as 6.5% per year.
#4 Know All the Fees That are Affixed to Your Financing
Nothing in life comes free, and when starting up in the property development finance business, you need to be aware of additional fees that can be charged to you. You already know you have to pay back the loan you receive plus the interest rate, but some additional fees can apply depending on you, your property, and the lender’s policies.
- Many lenders have a 1%-2% lender fee on the loans they approve for property development projects.
- Sometimes there is a lender exit fee that can be charged to you at about 1%-2% of the loan amount in full.
- You often have to pay for any valuation assessments or monitoring surveyed fees, and those fees vary all the time. Many variables play into the costs and fees charged to you, so you should be aware of the fee and ask about it per property development project.
Most brokers will expect to earn 1% for arranging a property development loan. The lender will usually charge a broker fee directly to you.
#5 Your Loan Has a Maximum Amount
Almost all property development finance lenders use metrics that calculate maximum loans when they’re determining the key factors they want to consider on your loan amount. There are no hard-fast rules and regulations in this category step, but some of the metrics used are:
- Loan to Cost – That when you’re putting up some of the money yourself and your loan cost fees and interest factors this into consideration
- Loan to Value – This is when you have almost no money to put into the property development yourself, so you need a maximum loan advance. This type of loan will require you have a monitoring surveyor assessing the property throughout the build-out or renovations for your drawdowns
- The loan to gross development value means you have a maximum amount and percentage from the lenderâ€™s loan that may or may not cover the property build-out or renovations
Sometimes lenders get ambitious and creative by combining all three metrics above when determining how much financing they are will to give you for a property development project. Most of the time, the lower amount of the combined three metric systems listed above is the one they will choose.
Your Best Next Step in Finding the Property Development Financing You Need
Your next best step in financing a property development project is to reach out to clearcommercialfinance.co.uk. One of the most important things to remember is that property development investment yields are never quick but often very lucrative. It takes a good strategy with a great company to help you find the perfect property for your long-term investment plan.
Just because someone else is making a lot of money in property development finance doesn’t mean you will unless you start the process smartly. It’s good to know you now have the step-by-step property development finance guide and expert company to help you get to the road of success. By using the right strategies which are listed above, it’s only a matter of time before you begin to see the benefits of your long-term investment goals.
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