Have you spotted the perfect site for a project, or come across a quirky old warehouse that’s ripe for conversion? Then you’re probably wondering how to finance your property development? There’s plenty of options out there, and our simple guides are a great place to start gathering information.
How to finance your property development?
Whether or not a property project gets off the ground usually comes down to funding. It’s great having ideas and extensive market knowledge to be able to spot the good opportunities, but knowing how to finance your property development is far more important.
The first thing to consider is what type of finance is most appropriate for your project and circumstances. This can be hard to determine without knowing some basic criteria and lending limits of specific loan types. For example, if you think your project will take five years to complete, then bridging finance is ruled out. If you’re borrowing less than £150,000, development finance loans are not appropriate. Speaking to a broker who specialises in property development loans is invaluable. They know what’s available over the entire spectrum of the market as well as lending eligibility criteria. Before you begin applying for finance for property development, nail down your plans, in exact, excruciating detail. Every lender that you approach will want to see this.
There’s no way to avoid some sort of equity contribution – but there are ways to reduce how much you put in;
- exhaust your own network – if you’re confident of your plans, beg and borrow from anyone who’ll listen
- some lenders (e.g. family offices, P2P, high-net-worth individuals) offer preferred equity, a cash contribution usually for a profit share
- take a secondary, smaller loan (mezzanine debt) from a different lender than the first charge lender
- some specialist lenders will offer over 90% of the total project costs.
Equity contribution will depend on the type of loan, so let’s look at the options for finance for property developers.
Property development finance options
Familiarising yourself with the property development finance options that are on the market will help in deciding which loan best suits your project.
Cash – there’s the old adage that cash is king, but in property development it’s not as one-dimensional. Whilst cash can fund an entire project, using development finance means equity can be spread across multiple sites instead of ploughed into a single development. Spreading equity can significantly increase your return on capital employed (ROCE).
Personal loan – not specifically development finance, most banks offer up to £25,000 but there are restrictions on how it’s used. They cannot be used as financing for property purchases but can be used to fund renovations.
Buy-to-let mortgage – a great way of investing money that’s languishing in the bank into a rental property. They require a minimum deposit of 25% and the property must be in liveable condition, with an EPC of D or above. Typically offered on an interest-only basis.
Buy-to-sell mortgage – another term for bridging finance, aimed at investors buying and selling a property within 12 months, avoiding the conditions of traditional mortgages like early repayment charges.
Bridging loans – fast, flexible short-term finance that can be used for a myriad of property investments, such as auction buys or sites without planning. Up to 75% gross loan to value. Read our other bridging guides for more details.
Property development finance – the jewel in the sea of finance options, this niche sector can provide developers with funds from £150,000 to £500m, or more, over a period of 9 – 36 months typically. They are approved based on the strength of the project and the team. Between 55% and 90% of development costs can be loaned (inc. lending costs).
Most property development finance options have higher interest rates than long-term financing, but this is outweighed by the potential profits that can be made.
What documents do I need for property development?
If you’ve selected your site and are ready to start applying for finance, the next thing to ask is what documents do I need for property development? Any development finance loan and certain bridging finance will require a full development appraisal presentation. It needs to be professional and accurate, fully demonstrating the merits of your project and giving lenders confidence and incentive to invest in your vision. As a minimum, it must include:
- an overview of the project
- developer and team CVs
- development appraisal – the main body of the presentation, with itemised costing of contractors, materials, etc., site details, and contingencies
- property schedule – specifics on every unit being built
- market comparison
- the professional team - for less experienced developers, involving architects, project managers, structural engineers, etc., with relevant experience is crucial to loan approval
Some other supporting documents that aren’t essential but bolster your chances of approval include:
- planning permission details
- design and accessibility statement
- brochures of previous projects
- a site tour video
As well as the glossy presentation, there’s some mandatory stuff that any property development UK wide might require:
- Asset and Liability Schedule
- Anti-money laundering and source of wealth forms
- S106 details if applicable (legal agreements between Local Authorities and developers)
At Brickflow we’ve created a presentation template that we know lenders love (because we asked them!) and all of the above steps are built into it. Any property development company will have experience in preparing the documents needed, so to stand out from the pile of projects on a lenders desk, register with Brickflow and utilise our awesome presentation.
Read more on building the perfect project presentation.
How to get into property development?
There’s a lot of information to take in, and if you’re still reading, you’re probably wondering how to get into property development? In our opinion, the best starting point is learning the property market where you want to invest. Get to know rental values and sale prices and familiarise yourself with what’s on the market, at what price and for how long. Rightmove.co.uk shows properties under offer or with lets agreed, so you can see the most recent market movements.
Research building costs, architect’s fees, materials, demolition fees and everything else in between. Try speaking with a property development company UK based as well as construction companies and obtain multiple quotes.
After the R&D, look for a good site/property and start drilling into the figures. At Brickflow, our innovative software allows you to input all the numbers from a potential site and assess how viable your project really is. You’ll be able to compare loans from nearly sixty lenders and see how much you could borrow against your specific project and at what rate. This means you can factor in lending costs to profit calculations.
Some property development lenders won’t consider applications from first-time developers, but on our results screen we have 23 different filters, one of which will tell you the lenders that will consider an application from a first time developer. So applying for a loan through Brickflow avoids time and money being wasted applying to inappropriate lenders.
How to get into property development? Tell your broker about us, or register with Brickflow to access the only development finance search facility on the market. Alternatively, contact us and we can connect you with the brokers already using our tech.
If you’re a broker, register with Brickflow and compare sixty lenders in under 60 seconds and help your clients get into property development sooner. You’ll be able to submit their applications online to multiple lenders in less than half an hour and secure a DIP the very same day.