Finance options for those looking to grow their portfolio
You’ve made it onto the property ladder, and now you’re ready to sink your teeth into your next housing project. Property investment or development is a natural progression for homeowners looking to grow their property portfolios – and it can be a great way to increase your personal capital. But even for experienced developers and investors, the lending market – and different finance options available – can be varied and complex.
When you’re borrowing money to fund property development, it’s important to get the right help and advice – not only to make the best finance choice for your situation but also to ensure there are as few delays as possible in getting the finance you need.
Property development finance is short-term funding that helps pay for building and development costs. Lenders require information about the type of development, the costs involved and projected end-value including your exit strategy, how you plan to sell the properties – in addition to personal finance information. Often the interest is capitalised during the development period, with the entire loan plus interest repaid upon the sale of the development or the refinance of any residual debt.
There’s a world of finance options available for property development. Let’s take a closer look at these options – and what you’ll need to keep an eye out for.
Finance options for property development
The first possibility of securing development finance is through a bank lender. Banks do tend to offer much lower interest rates, but they’ll cap their funding – meaning you’ll need to invest more of your own money to complete the development. Also, most banks will require a quantity surveyor report to justify the cost of development.
The primary driver for approaching a second-tier lender is the amount of funding available. They tend to lend against the completed value of the property, meaning you’ll need less personal capital and can borrow more to cover your development costs – including any unexpected expenses. Second-tier lenders can also be more relaxed with their application requirements, but they will almost always have higher interest rates. Most lenders can lend between 60-70% of your development or project costs.
Land development cost (LDC)
A common form of development finance, LDC provides property developers with the funds to buy and build a development property. It includes the soft costs associated with the development but is generally limited to between 70-80% of the overall land development costs of the project.
With this type of finance, you may be required to meet a pre-determined level of pre-sales before your application is approved and finance granted.
The amount of money you’ll be able to borrow as development finance will depend on the lending criteria you’re required to meet. Criteria will vary from lender to lender and depend on how extensive the project is, but here are some common factors that lenders will consider:
Just like a personal home loan, the more equity (deposit/capital) you can provide, the more likely you’ll find a lender to finance your development. In the eyes of a lender, greater equity will reduce the risk of financing the project. There might also be the option of using the property you already own to secure finance, so you don’t need cash up-front.
The proposed location of your development will also play a significant part in securing finance. Lenders will look at how well-suited the site or property is for development or investment. They’ll also consider the surrounding area and its value – is it an up-and-coming suburb or region, and what is the likelihood you’ll be able to sell or find renters?
While having property development experience can be a bonus, being new to the investment game doesn’t mean you won’t be able to secure funding. As a new developer, you may need to raise additional capital and you might not be able to borrow as much – but starting small isn’t such a bad thing.
Lastly, the profit potential of your development project will come into play in the funding process. Lenders will do their own value assessment to determine the profit margin, and therefore determine the profitability of the proposed development. Normally banks require much higher profitability than second-tier lenders.
The most important part of the development-finance process is getting financial advice as early as possible – and preferably from a broker who specialises in property investment and development. Getting the right finance in place is a crucial ingredient in development success and ultimately the growth of your property portfolio.
Speaking with property-development mortgage brokers will ensure you get the best loan terms and interest rate for your project because they have access to a range of different lenders and finance options.
When you’re ready to discuss your property development options, talk to one of the brokers at Global Finance.
**These are general guidelines and are by no means a reflection of bank or lending policies