How to grow a property development business
The UK has a chronic shortage of homes. Creating new homes by converting and subdividing older, larger properties, or simply refurbishing properties, can allow a property development business to tap into an apparently endless demand.
Of course, the market will fluctuate. There are areas around the county where price corrections are being seen, such as in parts of central London - but those price falls hide the fact that there are entire areas of regeneration in London where property development can provide lucrative opportunities. These pockets are defying trends in the wider property market and present good opportunities - the ability to spot an up and coming area can be key to your success.
There are substantial profits to be made, but property development is challenging, and there are several stages to arranging a profitable deal - and each stage may have its pitfalls.
- Finding a suitable property: Property commands a high cost in most areas of the UK. Even property in poor condition may be expensive - and, in some areas, property in poor order may be snapped up by development professionals before it comes on the market. You may find yourself waiting months for a suitable property to come up at auction or through the retail channels. When a suitable property does become available, you may need to act fast - and have instant access to funds to secure it.
- Creating a development plan: When you do manage to secure a property with development potential, you may need to call in architects and structural engineers to determine the best way to make use of it. Maximising the value of a property will, inevitably, involve additional investment and you may require planning permission for change of use - which will involve long delays while council committees sit and debate the merits of your scheme. Your property could, potentially, be standing empty and deteriorating, with no way for you to use the time constructively by starting work.
- Arranging the work required: Once a plan has been approved, you will need to bring in tradespeople who can do the work. A skilled team may be essential. If you are not a builder yourself, it is possible to arrange a turnkey deal, whereby a skilled professional can oversee the work and act as the project manager. This can reduce the stress of the work itself, but it will mean increasing your costs, even if it ultimately results in a problem-free project with high standards. Of course, if you are a builder, you may be able to coordinate the trades required yourself, but you will need to bear in mind that time spent on your development will mean time you cannot be earning by working for other paying customers.
- Selling or letting out the property: When the work is done you will require an exit strategy - a means of releasing the money you have invested in the project and repaying lenders who have provided the funds required. Whether you are selling the property as a whole, selling units piecemeal or renting out homes that you have created, you will need to involve solicitors, estate or letting agents - and probably have to wait months until the funds are yours.
All these stages will require funding - in fact, getting the most appropriate type of funding at each stage is the key to successful property development - and to building your property development business.
“Getting the right kind of funding is vital at every stage - and getting help to get the rates you want is essential.”
The funding you need to buy a development property
Most homeowners buy a property with a residential mortgage - a long-term loan secured on the property itself. A Commercial Mortgage works in a similar way, but is used to buy commercial property, which may be business premises or property intended for development or letting out.
A property bought for development may be suitable for a Commercial Mortgage but if it is in poor condition lenders may refuse to lend. Traditional lenders - high-street banks and buy-to-let lenders - will not lend on property that is not in a habitable and lettable condition. The solution, therefore, is a development finance deal, of which there are several types.
Property Development Loans
Straightforward Property Development Finance is a type of short-term lending designed to finance renovation or refurbishment of a property. They can cover:
- Small-scale loans to cover light refurbishment
- Lending to cover renovation and major conversion projects
- Funding for ground-up development, starting with an empty plot
As much as 50 – 60% of the site or property value can be advanced with additional stage payments available throughout the build at intervals agreed at the offer stage. Loan terms are flexible from 1 – 12 months. You can have arrangements with no monthly interest payments - to be repaid in a lump sum at the end.
You might also want to consider Redevelopment Mortgages.
Redevelopment Mortgages may be available for homes that are basically habitable but may require extensive modernisation.
For light and heavy refurbishments, you might want a 'Refurbishment Bridge’ finance option, which funds 6–24 months of building costs as well as part of the purchase price. Some may include the option to convert into a mortgage once work is complete and signed off.
What about buying at auction?
Property auctions are where properties that might otherwise be difficult to sell are on offer. Typically, these are properties in poor condition or may have been repossessed by a lender as a result of mortgage arrears. But, whether you are looking for a property for refurbishment or redevelopment, buying at the auction house means you will need you to be able to provide a large cash sum at very short notice. Very few people have the funds to buy a property with cash, even at auction prices.
The precise arrangements vary with different auction houses but with most auction sales, when the gavel falls on your winning bid, you will be expected to pay a 10% deposit of the hammer price immediately.
You will then be required to pay over the balance of funds, which will include the auctioneer's commission, usually within 28 days.
Failure to provide the full funds may lead to you losing both the property and your deposit.
In these cases, Auction Finance can provide the solution.
Auction Finance is designed to be arranged quickly and provide the level of funding you need in the necessary timescales. It is, basically, a type of term finance, similar to a Bridging Loan. It is designed to help you purchase properties at auction because it can be arranged extremely quickly, whether it is habitable or not.
It can also be used to purchase land.
Auction Finance, like other Bridging Loans, is designed for short-term use only. It is relatively expensive compared with a conventional mortgage but it does make it possible to raise the funds you need at short notice.
The loan can be as short as one day and run up to a maximum of 12 months. Loan amounts start at around £25,000, and there is no maximum.
Finance can be arranged within a matter of hours, and funds released in as little as 72 hours, under certain conditions – although it may be prudent to approach a lender and to get an agreement in principle before you commit yourself.
Financing the work
Once you have acquired your property, you need to carefully cost out the work before you begin. Always include a contingency.
Your initial Development Finance sum can be arranged to cover the work - or you may need to arrange additional funding with a short-term loan.
However, even the most experienced developers can run into problems. Unforeseen structural problems or demanding planners can mean costs increase beyond your budget. You may even find that you need to look at Refurbishment Finance. When this happens, we have a solution at Rangewell. Property Development Continuation Finance can provide the funding solutions for developments that have already been started - but where cash runs short - allowing work to be completed.
“Once you have found a suitable property in the right location, you need to move quickly. The quicker you can turn it around, the better – the sooner it’s finished, the sooner you can make a return on your investment.”
Your exit strategy
Once your project is finished, you’ll need to have an exit strategy - a way to get your money out.
Buy-to-let offers a long-term strategy, and lets you build up an extended property portfolio. You can simply rearrange your funding, from a high-cost property development loan to Buy-to-let mortgage.
Selling offers a more short-term strategy to quickly increase your capital. You are much more dependent on market conditions, and it is certainly riskier – although it does offer a more instant return-on-investment.
Properties sold incur capital gains tax, which is currently between 18% and 28% dependent on income, with an annual exemption of £11,700.
However, property can take time to sell. If you are waiting months to sell a property, your capital is tied up - you can’t get on to the next development - and you will stay tied into the Development Loan rates.
Development Exit Finance can provide the solution. So when your development project is completed, Development Exit Funding will allow you to pay off the high-cost loan you had to arrange to fund the project itself.
This will mean that the debt can be financed at a substantially lower interest rate, meaning that there is no need to rush a sale or take a low offer.
What’s more, a Development Exit Loan can reflect the full market value of your completed project - allowing you to use the value you have created. This means it can be a useful tool to help you raise capital to buy and fund the work on your next project.
Why you need Rangewell to find finance for your property operation
Property has many opportunities for niche businesses, and for those businesses to grow.
It also has many financial solutions.
You need a funding expert on your side to provide easy access to the various types of funding you will need if you are to enjoy that potential growth. At Rangewell our team includes property development experts who can work with you to understand your needs and the potential of your project.
We know every project is different, and so we make every loan application tailored to your individual needs and circumstances. Our experts can work with you to identify your funding requirements and to develop financial packages which will answer them.
We can help identify the most appropriate funding for each purpose as you grow, and find the most appropriate lenders to provide them.
So if you're looking for specialised finance for property developers, simply call us now to get our property finance experts working for you.