Leveraging Equity More Efficiently in Property Development
Not having a big enough deposit should not bar you from entering the property market. Read this guide to leveraging equity to get your next project underway.
From understanding your capital stack to working with the right people, let's dig deeper into how to make the most out of your equity.
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Property development is a competitive market that has a high cost of entry. Placing a deposit on property and land etc, especially commercial units, represent significant outlays of your capital. Considering many commercial property lenders demand deposits from 25-40%, you will need a significant chunk of funding to start a property business.
If you’re planning on doing property development, your capital will be used to secure funding against purchasing land or property - but how much you have available can heavily impact your ability to develop.
Even if you have little to no capital, however, there are still ways to secure property development finance. Although not having a significant deposit can complicate issues, there are still ways to plan funding for your property development projects in a way that can help you get your development off the ground and minimise your equity requirements.
So how can you better understand your equity considerations and secure the funding you need to begin working on your new project? Let’s take a look:
Master your capital stack
The capital stack, also known as the capital structure or funding structure, is made up of the layers of financing sources that are used to fund the purchase of a property project. They can be as multi-layered as you need, but typically they are composed of:
- Senior Debt: Generally around 60% of your funding, the senior debt is usually issued by bondholders or banks and is usually secured against assets.
- Mezzanine Debt: The investment groups or individuals supplying your residual capital to complete the property project.
- Equity Capital: The money the developer puts up themselves - your own money.
When you’re planning a new project, you should seek to determine the best capital stack to enable development without requiring too much equity capital.
Scour the market for lower equity rates
Whether you're an experienced developer with a portfolio of property or you’re relatively new, typically have the tendency to opt for big-name lenders. These lenders can ask for significant deposit amounts ranging anywhere from 10-40% of the project’s cost; which includes land, building, finance and professional fees.
This is a ‘swingy’ variance in that obviously the lower the percentage, the more affordable the deposit is. In a £10 million project, for example, 10% is £1 million whereas 40% would be £4 million, a vastly different amount that may be much harder to secure.
By working with Rangewell, we’ll help you access the market for specialist property finance and find lenders who may offer funding at a lower percentage. Doing so ‘unlocks’ a vast amount of equity so that you can expand your business, invest in a new project or progress to a larger site.
You may also be forced to profit share with an investor if you need higher equity percentages - which will devalue your finished project and cut directly into your profit margins. All of this can be avoided by simply shopping around, which is why it’s always a good idea to speak to Rangewell when planning property development to see which lenders we would advise.
Plan to get ahead
Planning permission is a tricky subject, but one that adds value to land. If you buy a site to secure planning permission on, you’ll add value to it during your planning process. This is called sweat equity and essentially puts a cost against your time and effort.
Some lenders will recognise this as sweat equity and will take the complexities of the planning process into account when assessing your application and lending opportunities.
If you secure private equity for a land purchase before you go through the planning process, you may be able to avoid paying the high-profit shares associated with completed developments. You’d do this by getting your investor to help with initial equity then securing planning permission. Once granted, you can then raise the development finance for the build and pay back the equity.
Partner with the right people
A single source of funding is usually a bad idea. Instead, you should seek investment from a diversified pool so that you have less risk. Good property developers recognise that the profit-sharing part of an agreement is the most important for their investment and is where you need to carefully plan. Don’t work with lenders who demand too high a portion of the profits.
Sometimes you can source some of your funding from non-conventional means such as friends and family or your professional network. These loans, whilst less ‘official’, are nonetheless a great way to circumvent the higher profit share and high equity percentage demands placed by professional lenders. However, it's worth noting that an equity investor will need to submit information about their skills and investment experience, so if a relative has worked on a scheme with construction delays in the past, for example, this could hamper your chances of getting the right finance.
Use second charge funding
If you have an existing property portfolio, some lenders will provide a second charge loan on investment properties. These use equity from your portfolio properties as security for a loan. They are flexible and typically quick to issue - making them a great alternative to re-mortgaging or spending too much of your liquid cash. Some lenders will issue second charges over multiple properties, which basically translates to an overdraft style facility that lets you raise a deposit when you need it.
Explore deferred land payments
If you lack equity but have your sights set on a piece of land, you might be able to utilise a deferred land payment. This refers to an agreement between the landowner and the developer where the owner agrees to partial repayment until the development is finished and the property/properties sell. While this can be useful for when you have low equity, it can be hard to convince a landowner as they’ll have to accept a second charge behind the lender and would be paid only after the lender.
If you can secure deferred land payments, your actual lender for development finance will have the first charge over the land and will provide all the build costs and some of the land acquisition costs. The lender is incentivized to borrow to you because you have essentially de-risked their investment: by developing the land that you have a deferred land payment agreement for, you can show that you’ll increase the value of the land and create a site worth more than you paid.
Lenders who allow deferred land payments can be hard to find, but if you lack the equity needed for standard funding, you should make the effort to seek them out as it can be a great way to get your development going.
Lend with Rangewell
When considering property development finance, work with Rangewell. We are specialist brokers who know the market inside and out, meaning we can help cut down on research time and guide you to the most appropriate funding options.
Having low equity or capital is not the end of your project. We can help secure finance against assets such as buy to let properties and explore other options to ensure your property development project can go ahead.
Whether you’re looking for a lender who requires a lower equity rate so you can maximise your profits or you’re interested in exploring alternative options such as deferred land payments, speak to our dedicated team today to see how we can help.