3 Great Ways to Funding Property Development

You may have seen a plot of land or a property for sale which is the perfect property development opportunity, but how are you going to fund it? This article will take you through the different options for funding property development as well as what you really need to know about each type of finance.

What is Property development?

Property development is the process of developing land to add value, usually by building a new property/ properties or by renovating an existing building or changing the use of an existing building. Property development can be both residential and commercial as well as mixed use, and can include: houses, offices, shops, hotels, educational facilities and HMOs.

From knocking a wall through to entire residential projects: What are the different types of property development?

Light Refurbishment

Light refurbishment is anything from knocking an office into flats or a large renovation project. Usually this type of development is purely cosmetic and crucially there is no planning required.

Heavy Refurbishment

Heavy refurbishment is any type of development where you are making large, structural changes to the interior, usually requiring planning permission. This could include development projects like  converting a house into flats or developing a commercial property into an HMO (house in multiple occupation). 

Building works will usually cost more for this type of project and some lenders may restrict you on the percentage of value of the property which you can spend on development. Sometimes conversion costs may be more than the actual purchase price of the property.

Ground up Property Development

As the name suggests, this is a development project where you are creating new residential dwellings. This can include anything from complete, new build properties to demolishing an existing property and rebuilding it as well as barn conversions.

Funding Property Development: 3 types of finance

There are 3 key routes when it comes to funding property development: Development Finance, Bridging Loans and Refurbishment Loans, all specific to different needs:

Development Finance

The traditional route to funding property development is through development finance which allows you to borrow a percentage of the purchase price and associated professional fees. This is usually up to 75%  loan to value (LTV) of the gross development value (GDV). Funds are generally released in fixed stages as your development project progresses. There is often an option to release more cash, particularly if the development has increased in value. The last stage of funding will only be released once the building is signed off by building control.

What you need to know about development finance

Interest on Development Finance

Some high street lenders specify that you pay monthly interest which can be a burden if cash flow is an issue, however the specialist lenders always work on a Interest roll – up basis, whereby you only pay the accrued interest at the end of the financial term. This means that your cash flow is not impacted throughout the build phase, when you need it most.

Find out about our Development Finance options

Bridging Loan

A Bridging Loan is frequently used if you need to secure an asset, property or land quickly to avoid losing it to another developer. However, this type of finance will only get you to the point of purchase. Planning is always required prior to applying for bridging finance and it is worthwhile considering that  you may need to change the current planning to get a loan.

After you purchase, you would need to change to a different type of finance, in order to fund the building works.

Bridging loans cannot be used for building works although there are a couple of specialist lenders who will consider this.

What you need to know about bridging loans

Bridging Loans LTV (Loan to value)

Bridging Loans are only offered at 75% LTV – depending on the asset. However, if your asset has a commercial usage class, most lenders would only lend 70%, for example. Therefore, it is very important to know the usage class on your asset before applying for any finance.

Interest on Bridging Loans

Some bridging lenders charge daily or monthly interest. 

Monthly: be aware that if your loan term runs just one or two days into a new month, you will be charged interest on the full month. Also, if you do opt to pay your interest on a monthly basis, the lender will need evidence of how you will service the debt.

Different ways to pay a bridging loan

1. Interest roll – up; this is where you only pay the accrued interest at the end of the financial term.
2. Interest deducted from the gross loan amount; Interest for the full term of the finance is taken on the day you complete, for example you may receive 68% instead of 75% which needs to be factored into your costs and cash flow.
3. Pay interest on a monthly basis; essentially paying interest as you go, much like a residential mortgage.

Find out about Bridging Finance

Refurbishment Loan

A refurbishment loan is similar to a bridging loan, it will fund a percentage of the purchase price, typically 70%  plus 100% of the actual building work costs. However, one caveat is that you can only access this funding if you have full planning permission secured, all relevant licences in place and you are ready to start the project as soon as you complete the loan. Similar to a bridging loan, a refurbishment loan offers all the same ways to pay, mentioned above.

Why high street or private banks may not be able to help but NM Finance can

When developing land and property, cash is king and often it may be possible to consider purchasing larger schemes, when less deposit is required upfront. Traditionally high street banks will require circa. 40% of all costs and at NM Finance, we work with a number of specialist, private and challenger banks which only require you to put in 10-15% of the costs.

The team here, also has experience of all development finance options ourselves and when dealing with complex developments, first-hand experience is invaluable.

Our Top 5 Tips for Funding your Property Development

1. Be very confident about your finances and numbers and carry out your due diligence. Ensure you have calculated costs for every stage of the development or refurbishment.
2. Have a strong team behind you which includes an architect, surveyor, solicitor, accountant (tax advice) and a good mortgage broker.
3. Make sure your planning and any relevant licences are in place where possible, prior to completing the purchase. The more expensive the finance is, the less time you want on the term.
4. If building works are carried out by a third party (you are not the builder) ensure there are definitive project start times and where possible enter into a JCT contract with the builder. 
5. Put a contingency budget in place which is realistic, particularly at the moment, with the current cost of materials. It’s sensible to factor in materials inflation.

Read our blog, ‘From Builder to developer: How to get into Property Development’.