What are the different types of property development funding?
The different types of property development funding available - and which is right for you
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Property development can be a very profitable venture. It does not require any formal qualifications and can provide fast returns. But, of course, there are challenges - and one of the key challenges you need to overcome is that of providing the funds you need.
Buying property - even run-down property - is expensive in the UK market. Developing that property, be it a quick refurb or a ground-up build, will also require considerable expenditure, whether or not you are in a position to do some of the work yourself.
Getting the right finance for your project is key to profits.
How can you make a profit as a developer?
There are several recognised ways of making money in property development:
- Flipping Properties: ‘Flipping’ is a term used when a property is purchased at a low price and then sold on for a profit almost straight away. Finding a bargain can prove difficult and you will need access to funds quickly.
- Property Refurbishment: Refurbishing property and selling for profit is a recipe for success, but competition for good projects is high and access to funds may be required quickly.
- Property Conversions: Converting property, from a house into flats or office to residential, can have a higher potential for profit - but more work may be required.
- Ground Up Development: Developments built from scratch are at the heavier end of property development. The potential profits can be very large if you are building multiple homes.
Whatever route you go down, finding the right property is vital. Agents, auctions, private sales websites & property sourcing agents can all help - but you will need to keep your eye on the costs involved with each property you view.
Make sure your plans are viable - will the council allow you to follow them? What will the work cost? What will the value of the finished project be - and can you make a profit? You need a detailed breakdown of costs, a buffer for unexpected contingencies and detailed comparable sale prices - and you must understand the market you’re selling in.
Only when you have the figures fully forecast and your plans finalised are you in a position to make a full application for funding.
What different types of funding is available for Property Developers?
You will also need to understand the various types of development finance available.
Refurbishment Finance allows you to buy and update or improve a dilapidated property. Loans may be available from £100k to £10m, and funding is based on the gross development value (GDV) - the value of the project once completed. This is also known as the value of the post-refurbishment work.
Lenders may consider lending up to 70% of GDV, with funds released in stages. These funds may cover both the property purchase as well as refurbishment works, although lending can also be available for developers who already own a property in need of work.
Terms of up to 18 - 24 months are available and interest payments may be rolled up in the total loan amount.
Commercial Development Finance
Commercial property development finance is designed to fund the build of new commercial property. When looking to fund the build of a commercial property, the potential value of the finished property will be key.
Funding can be more difficult to secure than residential development projects as fewer lenders understand the commercial property market.
We work with lenders across the entire lending sector and know those keen to fund commercial and mixed-use schemes across the UK. Our team of experienced advisers will take the time to fully understand the commercial realities of your project before talking to lenders and negotiating terms on your behalf.
A Bridging Loan is a short-term loan secured against property. Bridging loan lenders will provide construction finance of up to 65% of the value of the property. You can access the funding within a few weeks (depending on the nature of the project and your circumstances) and loan periods can range from one month to three years. The property can be residential, such as buy-to-let flats, or commercial, such as offices, factories or warehouses.
Bridging Loans are usually repaid quickly, either by the sale of the property or by another finance product designed for the long-term, such as a mortgage.
A Commercial Mortgage
A Commercial Mortgage is one of the most common forms of finance used to buy a commercial property and operates much like a residential mortgage, with a large loan secured on the property itself.
Generally, Commercial Mortgages are for 15 years or more and, as with a residential mortgage, the premises will be at risk if you are unable to keep up your repayments. The rates for a Commercial Mortgage are arranged on an individual basis and lenders will look at your project, your accounts and projections to ensure that it has good prospects for returning a profit and set interest rates based on the level of risk they believe it presents.
100% Development Finance
100% Development Finance, also known as joint venture development finance, can allow you to develop property without using your own money. It is designed to cover 100% of all purchase and build costs of the project. The lender provides all of the money needed to complete the project, and profits are usually shared on the sale. In general, the lender will still charge market-rate interest on the amount borrowed and will then look to take between 40-50% of the profit.
The advantage of going down this route is that the lender will usually have a strong track record, meaning they are easy to trust. In addition, there are only two parties involved in the application, making it very easy to manage.
Where interest is charged on the debt, it is usually allowed to roll up.
Mezzanine Finance is designed to bridge the gap between a developer’s available deposit funding and the loan available from the senior lender. By supplementing their own cash with Mezzanine Finance, property developers can secure the highest return on investment, with the lowest deposit contribution. This can fund a deposit shortfall or allow you to retain funds for future deals.
Mezzanine funders will usually secure their position by taking a second charge over the development to ensure their cash is secured.
Regulated Development Finance
Regulated development finance is used to fund the build of property that will become a primary dwelling of the borrower. This is ideal for self-build projects. Development finance applications become regulated if 40% or more of the property is to be used as or in connection with a dwelling.
Regulated development finance applications may be used when a plot of land is being bought to build a new home, or when planning has been granted for a property to be built in the garden of the client’s current home.
Residential Development Finance
Residential development finance is a type of funding used to finance the building or conversion of a property to provide residential units. It can be used to fund schemes from one unit to large projects creating dozens or even hundreds of homes.
Funding costs will vary widely between development finance lenders, meaning the cost of choosing the wrong lender can heavily affect the profitability of a scheme.
What about the cost?
With all types of Property Finance, securing the most competitive interest rate will be crucial. Lower rates mean greater profits and easier cashflow - although in some cases, all fees and interest can be rolled up into the loan, which can be settled with a single repayment.
The costs offered by different lenders will vary considerably and negotiation is possible - especially if you have the support of the Rangewell team.
There will also be fees:
- Arrangement fees are charged by the lender for arranging the loan and are typically 1.5% to 2% of the loan amount.
- Valuation fees cover the costs of a surveyor to value the property both before and post refurbishment works. The scale of these fees will depend on the size of the project.
- Exit fees are not applied by all lenders - those that do may charge a percentage of the loan amount or, sometimes, the gross development value.
What you need to secure Development Finance
To stand the best chances of securing the finance you will need:
Details of Planning Permission: Planning details will allow the lender to understand the scheme. By working through the planning documents, including the drawings, the lender can get a handle on the finished scheme and can use this information to assess that the quoted costs make sense.
Details of Any Planning Restrictions: Planning restrictions and Community Infrastructure Levy - or CIL payments - are vital to viability. CIL is charged on larger projects and can be of vital importance, as where the required payment is large, it will affect the profitability of the scheme.
Full Breakdown of Costs: A lender may accept the headline figures to start with, but only when they see the detailed breakdown will they be able to make a final decision and develop drawdown schedules.
Your development CV: Proof of your experience is important to many lenders. Even if you’re an inexperienced developer, highlighting your credibility upfront, we can ensure the lender feels comfortable in your ability to handle the project - and can help reduce cost.
Schedule of Works: Breaking down the schedule of works in detail and by stage, and supporting it with a full breakdown of costs and the schedule of works ensures you appear professional. What’s more, agreement on stage payments becomes far easier.
Details of the Team: If you are working with well-regarded architects and contractors it will strengthen your application. Detail exactly who you are dealing with upfront will also help to avoid delays.
Your Proposed Exit Strategy: Whether you’re looking to let the property, sell or refinance, you need to be sure your strategy is viable. The lender will want to know they are secure in getting their money back.
The gross development value (GDV): The GDV is usually expected to be at least 20% higher than the total project costs. GDV should always be backed by the opinion of two or more local agents, and ideally comparable evidence, if available.
Help from Rangewell: Most lenders will only consider applications that have been “packaged” by experienced brokers such as Rangewell. This means that we can help you prepare your proposal as a fully-fledged business plan.
How Rangewell helps secure the development funds you need
We can use our property development funding expertise to support your business pan. We know all the lenders in the market, and pinpoint those most suitable for your project, and use our reputation and expertise to negotiate on your behalf.
As part of the negotiations we carry out for you, we will try to secure the most advantageous deals on the key aspects of your finance:
The interest rate you pay will directly affect the profitability of your project - and with large sums involved, even a fraction of a percentage point will affect your profitability. We will aim to secure the lowest possible rate on the best terms, and we can also negotiate for your interest to be “rolled up” so that you only have to pay it at the completion of the loan term or point of settlement. This leaves more money available to you for your project.
With the high cost of property, a fraction of a percentage point can make a substantial difference to what you actually pay, and many lenders are simply not able to provide any kind of funding for property used for short-term letting. At Rangewell, we know those that are.
Length of loan facility
Your project may overrun. We can help extend the length of time you have to pay back your facility - and if things move more swiftly than expected, arrange the option of no interest penalties for early settlement.
The more you borrow, and the less deposit you need to commit, the more freedom you may have to deal with snags a the project develops - or you may want to work on a parallel project which will also demand cash. We will attempt to secure the most advantageous LTV for your finance facility possible so that you have more cash at hand for the project.
We arrange with your lender a staged drawdown sequence. This means that you only take money from your facility when you need it and, as a result, you won’t pay interest on the balance of the facility which has not been drawn down.
Stages may include:
- Purchase of land and/or existing property
- Land cleared and work begun
- Footings installed
- Walls and roof installed
- Building watertight
- First and final fixes
We like to make life easy for both our clients and our lender contacts. As such, we always submit our applications fully packaged. This ensures there is enough information available to the lender to make an informed decision on the application quickly.
The advantage to you, as a client, is that your application will be assessed quickly. If the outcome is positive, then you can move forward quickly to secure the site. If unsuccessful, it allows us to react quickly, securing an alternative finance route for you.
So whether you have a straightforward, small-scale funding need for a single property, or require a complicated ‘Jigsaw’ funding plan made up of a combination of financial products for a major holiday home development in Britain or overseas, we can work with you to find the answers.
Call us now to get our experts working for you.