New to property development? Planning to renovate a house for a quick sale? Perhaps you want to build a mixed purpose development from scratch? Flummoxed as to what funds you need?
Whatever your situation, financial expert Mike Collins Mortgage Broker – who has 17 years’ experience in the industry – is here to give you some pointers especially for newcomers to the property game.
Before he gets into the nitty gritty here are a few of the terms you might need to know….
Flipping
If you want to flip properties, it’s handy to have very quick access to funds. But what does flipping mean?
You buy a property, do it up and sell it for a higher price shortly after it’s been bought. Think about those people you see on Homes under the Hammer!
Conversion
This the process that means changing a building for another use. For example, you may want to convert one house into a bock of flats or a hair salon into an office.
Ground-up development
Here we are talking property developments that are built from scratch. It may be an housing development, offices or even mixed-use properties.
Refurbishment
Not dissimilar to flipping but may take more time, is someone who wishes to purchase a property with the intention of refurbishing it to sell to make money.
What is property development finance?
Property development finance is any kind of funding you can get for a residential, commercial or mixed-use project.
To make a profit, however, you need to choose the right kind of funding. No one wants to shell out their profit in interest payments.
Here is a quick summary for some of the property finance terms you might hear mentioned:
Commercial mortgages – Also known as business mortgages, these let business owners borrow funds required to purchase property or land. Just like a residential mortgage, cash is borrowed from a high street bank or lender and repaid in monthly instalments, with interest.
Residential development finance – This is a type of finance loan that can be used to pay for construction of a residential scheme. This loan is offered over a short-term period on an interest-only basis and the construction funds are released in staged drawdowns.
Regulated development finance – This funding is usually used to build a property that would be the borrower’s main residence. Development finance becomes regulated when 40 percent or more of the property to be built is used or linked with a main residence dwelling.
Bridging loans – These are short-term loans with high interest rates, but are useful in the event you need to purchase something and your deposit isn’t immediately available.
Mezzanine finance – Just as a mezzanine floor slots in between two storeys of a building, mezzanine financing sits between two types of funding: debt and equity. Models can be complex but put simply, this is a loan made against a potential stake in a company’s equity.
Second charge loans – This works as an extra loan that you pay on top of your existing mortgage. These are sometimes known as secured loans.
Auction finance – Auction Finance is another type of bridging loan but used specifically for buying property at auction and to complete a transaction quickly (usually within 14 or 28 days).
How do I need to get property development finance?
To work out which of the above funding options would be best for you, it’s always a good idea to consult a financial advisor. They can help you to work out how much you would need and which lender to approach for a good deal.
You’d also need to work out how long the project will take as you don’t want to run out of cash halfway through!
Any of the following criteria will always help to strengthen a funding application: planning permission documents, breakdown of any costs, previous experience, detailed works schedule, exit strategy and a gross development value.
Good luck!
