Property development loans

Planning to expand your business flipping houses? Then now might be a good time to read our guide to property development loans.

By Martin Brackstone on 28/10/2019

Property Development Loans

Property development is big business - it’s an industry with the promise of high profits, but you often need a big pot of money to get started. That’s why there are lots of property finance options out there, which can help you get your construction project off the ground.

But what’s the right finance option for you? And how do you get started?

If you’ve been dreaming up a project, and you’ve been wondering how to get finance for property development, then it’s time to read our guide to property development loans - including what they are, how they work and the benefits they bring.

What’s covered in this guide?

What is property development finance?

Property finance is a loan that can be used for purchasing property you want to develop, refurbishments, converting an existing building or for new build developments.

It could give you the opportunity to work on projects that are bigger than your own budgets - whether you’re working on a new build, conversion or renovation. It's most commonly used by property developers, investors and landlords, property development finance helps you get your hands on funds when working on a development project.

Property development finance is a bit of an umbrella term, but typically covers all types of finance options, specifically for property development projects - from refurbishment finance, residential development finance through to commercial property finance. Here we’ll be taking a closer look at property development loans - a specific type of property development finance.

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What is a property development loan?

A property development loan is set up as a short-term loan, only to be used during the build of the project. It is paid out in stages, where funds are released throughout the construction process, normally once key parts of the project have been completed.

With a property development loan, you may be able to get a larger sum of money than with an alternative option. That’s why a property development loan tends to be a preferred choice when undertaking a major project, such as building on a piece of land from scratch.

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How does a property development loan work?

A property development loan starts with an application. Your chosen lender will want to know all of the nitty gritty details such as the value of the property you wish to buy, development plans and your exit strategy.

Be sure to do your homework and be prepared to answer a wide range of project questions, such as:

  • The current value of the property (if owned) or the purchase price (if not)
  • The predicted value of the property at completion (this is known as the Gross Development Value)
  • A breakdown of the building and renovation costs
  • Any drawings or plans
  • The development schedule, showing the different build stages and milestones
  • A portfolio or CV to show your experience as a developer
  • Details of any other professionals you are involving in the project
  • A copy of the planning permission and building regulations, including any restrictions that might apply
  • Your exit strategy (for example, sale or refinance)

If your application is successful, then arrangements can be made for you to start receiving the money. Initially, an advance can be made against the value of the site, which can be used to purchase the site or begin construction. We’ll be going into more detail about this later on, in What are the key features of property development loans?

Throughout the rest of the development process, the remaining funds will be released to you in parts. This is usually based on build stages that you agree with your lender. You’ll have your progress checked on regularly - but this is just to make sure everything is on track before any further funds are released.

This process will keep going until the project is complete and the loan is ready to be repaid. Most people are able to pay back their loan by selling the property, or through refinance.

Key features of a property development loan

Size of loan

This really can vary, and many lenders don’t even have an upper limit. Especially if you have a strong exit strategy, it’s possible to get a multi-million-pound loan. Some lenders will, however, offer a minimum loan amount of around £50,000.

Loan to Gross Development Value

The Gross Development Value (GDV) means the value of a property, once the development is complete.

Most lenders will work out what they’re willing to offer based on the GDV, with the standard being between 60-70% of the GDV. This can really help if you are needing to buy the site.

Loan to Cost

For the development costs of the project, you can then get funding which is released in stages to support the construction process. It’s possible to get a property development loan that covers 100% of the development costs. But keep in mind that the higher the percentage the higher the risk – so you may see steeper interest rates.

Experience

Lenders aren’t always willing to take risks, so they will be looking for proven track records. Demonstrating any past experience of similar projects, from you and your team, will really help your application.

Short-term loans

Unlike a mortgage which can last for decades, these loans are for specific projects, and need to be paid back in a relatively short amount of time.

That’s why most lenders will offer terms between 12-24 months.

Milestones

You won’t get all the money in one lump sum. Instead, the funds are released in stages, normally based on development milestones. To keep track of this, a surveyor will get appointed to regularly check your progress.

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Who are property development loans for?

Property development loans are for experienced developers and builders, to help to cover the costs of all sorts of different residential and commercial projects - whether that be houses, shops, offices or industrial buildings.

The majority of people applying for property development loans will be:

  • Experienced developers: A developer who’s been doing this for years, and can show lenders past experience.
  • Professional builders: Builders who have purchased land to build houses to sell on.

Lenders will always prefer applicants who already have a background in development projects. So if you are a first-time developer, you may need to work a little harder in showing that you know your project inside out.

Benefits of property development loans

When it comes to financing a property development project, there is no one-size-fits-all solution. That means it’s really important to weigh up all the pros and cons against what you want to achieve, before taking out any kind of finance.

But with property development loans, there are a number of benefits which could work in your favour.

Quick access to funds

Getting hold of finance from mainstream banks for development projects can be tricky - and not to mention a lengthy process. With development finance lenders, the funding can often be released quickly, which means you can get started on your project a lot sooner.

And as a short-term loan, you won’t be tied down with a loan for longer than you need.

Take on larger projects

Development finance allows you to take on much larger projects than would otherwise be possible.

And depending on your team and timeframes, a loan may even allow you to take on multiple projects at once - which could mean bigger potential profits that would have been previously out of reach.

Use your savings elsewhere

By getting extra funds through finance, you don’t have to put all of your savings into a single project. It’s a big risk putting all your eggs in one basket, so this way you are able to protect some of your money. Having some of your own money set aside can also give you wiggle room, should another opportunity come up.

Property-Development-Loans-Drawing

Property development loans vs bridging finance

Property development loans and bridging finance are both types of property finance. They are also both offered as short-term loans. But that’s where the similarities end.

You’ll see both terms when looking into property development finance options - and they often get used interchangeably. It’s important not to get them confused though, as they are two different ways to finance your development project.

The biggest difference between them is the way you receive the funds. With bridging finance, you get a one-off loan and, as the name suggests, this is used to help bridge a gap in cash flow. As we’ve already uncovered, a property development loan is released in stages, based on you staying on top of your development milestones.

So that’s how they’re different. But when should you use one over the other?

With a property development loan, it’s possible to get a larger sum of money. This makes this method more ideal for larger-scale projects, such as building from scratch.

Bridging finance would be more appropriate if you’re looking at a lighter refurbishment, rather than big structural changes. Or perhaps you need funds quickly to purchase a site, but you have your own capital for the development costs.

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