Funding property development: property development loans tips

Funding property development: property development loans tips

Raising finance for property development

If done in a professional and organised way, property development can be very financially rewarding. However, there are also significant risk involved. If you need to raise finance for your property development project you will need to convince the lender that you know what you are doing and that their money will be safe if they loan it to you. Proper planning to the level appropriate to the complexity of the development will need to be demonstrated to the lender before they will approve your property development finance.

Funding a property development is riskier for lenders than a buy and hold (owner occupied or investment) property loan. Therefore the lender will be more cautious and have stricter assessment criteria. Once you have completed a number of successful property developments and can demonstrate that you know what you are doing, the banks and lenders will be more willing to lend you money. However, until you have built up a track record it is advisable to have an experienced team of professionals, including an experienced project manager.

Using a finance broker that specialises in property development finance will also make your finance application run smoothly. Oak Laurel has specialist finance brokers that know the different lender’s requirements and can guide your application through the process.

What do lenders expect in a development finance application?

When you are applying for development funding you will want to tailor your application to the lender(s) to which you are applying. Each lender has their criteria or conditions that need to be met before they will approve a property development finance application. This is not unlike other types of credit applications, however, the lenders view property development finance as investing in a business and that want to know that the business concept and profitability stack up and are worth the risk of their investment.

By putting together a quality finance submission in the form of a business plan or dossier for your project you will be demonstrating to the lender that you have considered all of the different aspects of the project and that the project is a low risk and profitable investment for them.

The process of putting together a business plan for your project that includes a detailed feasibility will also help you as a developer in making sure that you have considered all of the different aspects, identified problems and how to overcome them before your project starts. If in the end you can’t see a profitable project in the planning stage to there is no point for you to raise finance for property development or undertake the project unless something changes to make it worth doing.

What should be contained in your development finance application?

Your application should contain a summary about the project and its profitability but also contain a project feasibility which is the details of the project and of how you have come up with the numbers. For example if you are building a multi-unit development or multi-townhouse development, you will need to provide a break-down of the costs (where applicable) of acquiring the land; site-Related costs; building costs; professional fees and expenses; letting expenses (where the finished development will be let/rented to tenants); sale costs; legal costs and fees; planning and building regulation costs; cost of raising finance; holding costs; interest charges. You will also need to provide an estimate of the revenue from the sales. The values you are stating in your calculation should be estimated accurately, for example if you state that the finished development is a number of townhouses or units you should be able to demonstrate how you estimated the sale prices based on comparable sales.  

Property development valuation process

After assessing your application on paper, if the lender is still interested to proceed, the lender will require a valuation from a professional valuer. The valuer will go through your proposal and independently assess your project. If there are any issues like missing expenses or underestimates of the final sale prices, the valuer will identify them. This is where some poorly planned projects or projects with problems run into trouble.

Required property development profit margin

Often the financier will require the developer to demonstrate that a heathy profit martin will be obtained from the project. Typically, a profit margin of 15% or more of the total development cost (after all expenses including interest) will be required by the lender in order for the project to obtain finance.

Property development finance interest rates

Lenders generally do not publish their Property development finance interest rates. Instead these are negotiated between the lender and the developer or finance broker on the developer’s behalf. This is one area where a good finance broker can be a real asset to your development project. A good finance broker with experience in property development finance will be familiar with the interest rates, terms and conditions that lenders are offering and can often get a better package and your finance approved quicker than if the developer negotiates directly with the lender. This is particularly true if the developer has limited experience in financing developments the lenders may consider them an easy target.

Get your property development financed: Property development finance 

Find out about how to get your property development finance approved. 

See more about property development loan tips: Property development tips

Undertaking a small property development? May be a construction loan will be a better option.