If you are a landlord, investor or property developer there is a wide range of finance opportunities available to assist you kick off with your next project. The alternative lending market can feel complex and big even for experienced developers. On this page we will go through some of the things to think about, so you can choose the most appropriate property development finance option.
Commercial mortgages can be utilized in purchasing commercial property like offices, shops and warehouses — almost anything that is not private residential property. Generally speaking, they function the same way as private mortgages, assisting you spread the cost of a large purchase over time (usually over a number of years).
The most direct commercial mortgages are taken out by already established businesses who want to purchase their own premises, where the business already operates. A good example could be an ophthalmologist who wants to buy the building where he/she practices rather than paying large amounts of rent, he/she would rather own the building, but cannot afford to pay for it instantly.
If you do not want to pay cash yourself for the property, sometimes it is possible to secure 100% of the finance using additional security but you’ll need to have favorable circumstances for example a history of operating from the same premises and a reliable trading history. While it's simpler to secure a commercial mortgage as an existing business, it's possible to get one for a startup too even though it is more challenging because there is more risk at stake for the lender.
Commercial mortgages vs. buy-to-let mortgages
Another scenario where a commercial mortgage could be suitable is when a landlord with a large property portfolio wants to purchase more property. By joining multiple property into a single mortgage, it is possible to reduce arrangement fees and take advantage of having one point of contact with one provider as well as economies of scale.
The difference between this type of mortgage and the buy-to-let mortgage is scale. Usually it is a setup that would be reserved for a full-time landlord owning multiple properties, and would not be adequate for a private individual acquiring their first rental property.
Auctions can be a fast way to purchase a property at a discounted price, and there exists lenders who specialize in financing auctions. Once you have made the winning bid, auction houses usually require you to pay the funds within a period of 28 days implying you have to move fast to secure your funding.
Finding a lender who specializes in auction finance means you can get the money pretty faster than usual, so it’s the best path to take if you are thinking about property auctions. You can sometimes get the cash within a week if possible.
Also, there are lenders who will give you finance even before you attend an auction, so you can arrive ready with an 'agreement in principle'. This type of set up can be particularly useful for already established developers who have the experience. But even in more challenging cases where cash isn’t in place, it is sometimes possible to get funding for zealous first-timers who have purchased property at auction with only enough to cover the deposit.
Identify your Funding Options
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How much cash do you need?...............$
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Development finance or bridging finance
The next kind of property funding is bridging or development finance. This refers to any short-term funding that helps settle the costs for building and development. These two terms have considerable overlap and can sometimes be interchanged, but the two are distinct. The principal thing that determines if you require development finance or bridging finance is how big the project will be.
How broad are the building works going to be?
This is the most important question you need to ask yourself before you explore your finance avenues for renovation or refurbishment. To evaluate what type of finance required, it is useful to think of projects in three broad categories;
This is the most direct type of project, where the main changes are often aesthetic rather than structural but can sometimes involve some internal work on ceilings, walls and floors.
Heavy renovation or refurbishment
Same as aesthetic changes, this could necessitate moving internal walls, electrics or plumbing, adding external walls and rooms, partial demolition or rebuilding.
The most involved kind of property project, starting with an empty piece of land or a very heavy conversion/refurbishment.
The term in property development is not clearly defined and so is subjective to the individual using the term— and somewhat confusingly, all of the above are different kinds of development.
Property development finance in practice
Depending on the kind of project you are embarking on, there is a world of finance avenues available. You might want a refurbishment bridge which finances 4–24 months of building costs and sometimes comes with the option to become a mortgage later on. This kind of product would cover the majority of light and heavy refurbishment.
For more extensive projects and ground-up developments, you can find development finance to pay for both building costs and land purchase. For example, if a developer wants to purchase a plot of land for £200,000 and spend extra £600,000 building properties on it, a lender might fund 50% of the plot purchase and 70% of the building.
Experienced developers who act as landlords can also give their property as collateral to secure lending. With enough equity free seed capital in your portfolio, you can get funding to buy more properties allowing you to grow your property portfolio without having liquid cash.
Property development is a complex area especially when it comes to funding. Ultimately, the best first step to take when evaluating what type of funding you need is to assess how broad the project is, how much it is likely to cost and how long it will take in both the worst- and best-case scenario.
All successful property developers are good planners and obtaining the right finance in place is a critical ingredient in development success irrespective of whether you are buying your company’s premises or expanding your rental portfolio.