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Property Development Loans

February 12, 2016 | Comment

By nature, successful property developers are almost always good planners and this skill is one that should be put to use when securing the best property development finance.

Before the type of property loan is decided, the development itself needs to be considered. The question you need to task yourself is: How big is the property development project?

How extensive is the property development project?

The size of the project can often be categorised as either refurbishment or development. Refurbishments usually just deal with the aesthetics of a property rather than any structural work.

Development projects on the other hand can involve moving walls or installing plumbing or electrics. Development can also include partial demolition or rebuilding parts of the property; including extensions, external wall or complete redevelopment of a single home to a HMO (House in Multiple Occupation) suitable for renting.

The size of the project will give you a good indication of the price and duration of the work. You should take into account both the best and worst case scenarios before deciding the best route to acquire the appropriate finance option.

Development loans

Since the European debt crisis of 2012, high street lenders are less likely to lend and when they do, it can take weeks for the loan to be underwritten. The ability to obtain a loan will largely depend upon your financial status and the ability to provide a 25% deposit.

As a result of these market changes, developers may have to find alternative funding options that have been developed for purpose:

  • First charge bridging loans are short-term loans that can be arranged extremely quickly. Usually funding can be sourced within just a few days, making this an ideal solution for those purchasing properties at auction. Bridging finance can be underwritten against the property and other collateral; or for experienced developers, against other properties that they own.
  • Second charge bridging loans can be used to increase the developer’s cash flow. This enables developers to buy a second property before they’ve sold the first or complete a stalled project.
  • Joint venture investors are available when other financing options are unavailable. Property training experts like Glenn Armstrong (http://askglennarmstrong.co.uk) can introduce you to like-minded developers with capital to invest. The great thing about JV investors is that many of them can act as mentors for new developers.

When borrowing, you should be aware that property development finance will have higher interest rates in comparison to standard mortgages. However, standard mortgages have early exit penalties which often make bridging loans and joint ventures preferred options for developers.

 

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