Finance, Get Funded

How to Finance a Property Development

Business Advice | 7 November 2022 | 2 years ago

There is no denying the hefty costs associated with property development. Whether you are building a large commercial building from the ground up or converting an existing property, financing any building development can be tough. This is because there are a lot of finance options available to you, and it’s not always easy to know which is the right one for your project.

What is Property Development Finance?

Unless you have a lot of money saved, you will need property development finance to cover the cost of your project. Property development finance works by a lender giving you the money to finance your property development, and you then repay this at a later date.

How Property Developers Raise Finance

There are a lot of different ways to finance a property development, and this blog is going to cover the following options; cash, buy to let mortgages, buy to sell mortgages, bridging loans, personal loans and property loans.

Cash

One of the easiest ways to finance a property is using cash, as there are no lengthy borrowing processes and there is no need to work with a lender. Cash also keeps property development costs down, as there is no interest to pay on the amount borrowed. However, if you don’t have the cash readily available, this isn’t a viable option.

Cash and calculator

Buy to Let Mortgages

If you are planning on renting out the property development, you could be eligible for a buy to let mortgage. You must have a minimum deposit of 25% of value of the property to get a buy to let mortgage, and a lot of the eligibility requirements of standard mortgages apply. You only pay the interest on most buy to let mortgages, and the loan is then repaid at the end of the mortgage term.

The benefit of a buy to let mortgage is that by repaying only the interest, and charging rent on the property, you have a steady income stream. However, there are costs that come with letting your property and these could eat into your profits.

Bridging Loan

A bridging loan is a way to borrow money on a short term basis, and they are used to ‘bridge the gap’ between selling and buying a property. If you need to buy a property before selling another, you can use a bridging loan. There are closed bridging loans and open bridging loans available; the former has a specific end date in which you must repay the loan, the latter has no end date.

Bridging loans are quick to arrange, and there are a range of monthly repayment options. You also have the benefit of not missing out on buying a property, simply because you haven’t yet sold another one. However, bridging loans do tend to have high interest rates and fees.

Personal Loan

If you need to borrow a relatively small amount of money to finance property development – anywhere between £1,000 and £50,000 – a personal loan could be the ideal solution. Personal loans are available from a range of banks and lenders, and they aren’t secured against any assets. Once you have received the loan, you are required to pay it back in installments, with added interest.

Personal loans are good if you are in need of a one time sum quickly, one that you will be able to pay back within the agreed terms. There is a lot of flexibility and versatility with personal loans, and they are generally offered on an individual basis. However, personal loans do need to be paid back with added interest.

 Property Development Finance

Property development finance is an option for big projects, such as developing buildings from scratch. It’s used to fund residential and commercial building projects, and it’s one of the key ways of financing property developments that are more costly than standard loans and mortgages will cover.

This type of finance is usually given as a loan against land purchase or in multiple stages, to cover costs throughout the project. There is generally a good return on investment when you take out property development finance, which tends to outweigh any associated costs.

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