Without funding, property development is just a dream. Most property developers must start somewhere, and that’s with the help of financiers through loans. Property development loans are structured to fund the construction of properties, and in some instances funding multiple properties under one title. You will apply for a residential property development loan to develop townhouses, triplexes, or duplexes of up to four units. If you plan to develop a commercial property, you will probably need to apply for a larger loan. So how do you finance property development? Let’s discuss it.
Residential Property Versus Commercial Property Finance
First, you need to figure out whether you are developing residential or commercial property. Whether you apply for a residential or a commercial loan depends on how many properties you are building. If you are developing a commercial property, the interest rates for your loan will be higher, and your fee structure will be different too. Banks are more conservative when it comes to commercial property development lending, so you will have to supply a lot of additional information in order to meet their criteria to qualify for a loan.
What Are Your Finance Options?
Because the costs are higher, if you are embarking on a commercial property development project, your finance solutions will be different to that of residential development. This may play a role in the type of property you choose to develop and your loan to value ratio. A loan to value ratio (LVR) is the amount you are borrowing represented as a percentage of the property’s value. You can lower your LVR with a bigger deposit.
How Property Development Finance Works
Typically, your loan will cover between 70% and 80% of the cost of the project. In both residential and commercial property development, you will have to provide a percentage of the funding yourself. Your lender may also require a contingency fund of between 10% and 20% of your total loan amount in case of emergencies or any shortfalls. Your loan will usually only cover hard costs such as labour and materials. Things such as legal fees, architects, and land clearing are considered soft costs and may not be covered by your loan, so you may have to secure funding for these aspects of the project separately.
Applying for a Loan
When applying for a loan, your financier will require a detailed feasibility study to show that you have considered all the variables of the project. You will also have to supply additional information such as your site description and its zoning, the cost of the land and construction, your design concept, projected profit margin, timelines, your experience in the property development field. Your lender may ask for more information, but this is a start.
Securing finance for property development is tricky, but if you have properly prepared, you are more likely to secure the finance you need. Before you set foot in a financial institution, make sure you’ve written a business plan and conducted a feasibility study that’s sure to get you off to a good start.