Property Development Finance 101: What You Need To Know About Obtaining Finance For Property Development

By: Aaron Robbins0 comments

Without financing, getting any property development plan to fruition is futile. Accessing the funds you need to get your development project off the ground is made easy when you work with Diverse Funding Solutions.

If you’re looking at obtaining finance for property development, we take you through everything you need to know about property development finance.

What is property development finance?

The property development process is an involved, timely and often costly exercise, however, one that comes with significant financial reward if executed successfully. Property development finance is a specialised form of business finance (or commercial loan), specially-designed to cater to the funding requirements associated with property development.

Property developers raise finance for a property development project in a number of ways:

  • Using their existing cash.
  • A buy-to-sell mortgage or buy-to-let mortgage.
  • Bridging loans.
  • Specialised mortgage or short-term development loan.

Using cash to fund development projects

Often the most straightforward and efficient way to finance a development project is to use cash. However, for first-time property developers, they may not have the upfront capital to be able to cover the full expense of a commercial or residential property development.

Using cash also depletes a developer’s reserves to have sufficient funds to cover any other business expenses, or unexpected costs that may occur during the development process — this is where development finance or a construction loan comes in handy.

Buy-to-sell mortgages

Some investment property mortgages have a condition that locks you in for a set period of times (often two years) before you can sell the property. However, property developers often access their profit through selling completed projects as soon as possible after completion.

A buy-to-sell mortgage allows a property developer to sell the property as soon as practical after the development has been completed. However, in exchange for this flexibility, a buy-to-sell mortgage usually has a required deposit amount between 25%-40% of the project value.

Buy-to-let mortgages

Buy-to-let mortgages are similar to buy-to-sell mortgages in that they required a hefty deposit amount, and usually come with higher fees than other types of development funding. A buy-to-let mortgage allows the property developer to create a rental income from the property, either by letting the full space, or partial space of the development.

Bridging Loans

Bridging loans are a short-term loan that provides finance to bridge the gap between a developer selling an existing project, and purchasing a new project.

When the existing project is sold, the proceeds are used to repay the loan against the new development. Depending on whether you choose an open or closed bridging loan, will determine how long the bridging term lasts.

Must know: If you fail to sell your existing project in the allocated bridging loan term, you are required to repay the full loan amount plus cover all interest charges accrued on the loan.

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How does a property development loan work?

Property development loans are offered by certain private lenders in Australia, and are an asset-backed, short-term finance solution to fund the cost of either commercial property development or residential property development.

There are two main types of development loans:

Total Development Cost (TDC) loans

Under a total development cost loan option, the loan amount covers the total development costs, including:

  • Property purchase costs.
  • Building costs.
  • Finance interest costs.
  • Property holding costs (such as insurance and council fees).
  • Property marketing and sales costs (such as advertising the finished product).

Gross Realised value (GRV)

Also referred to as the gross realisation value option, this loan option is for the projected completion value of a property development project. Project lenders often lend a higher percentage of the GRV than what most banks are willing to offer.

Who can get a property development loan?

Diverse Funding Solutions offers finance for Australian business owners, regardless of whether they have any property development experience or not.

What are the loan terms of property development loans

At Diverse Funding Solutions, we offer property development loans with terms of up to two years. Development loans are often offered with interest-only repayments.

What are the interest rates on property development loans

As development loans are largely offered by private lenders, the lending institution will set the interest rates depending on market factors and information in your loan application.

Good to know: Diverse Funding Solutions have some of the most competitive interest rates in the private lending market.

What you need to about obtaining finance for property development

If you’ve got your sights set on a planned project, you’ll know the ins and outs of your project thoroughly. This information is going to be important when obtaining property development finance from a private lender, such as Diverse Funding Solutions.

You’ll need to ensure that you have:

  • An understanding of the hard costs of the project.
  • A copy of your development plans, including a feasibility study.
  • Any reports or assessments from your quantity surveyor.
  • A copy of the resume for your property developer a.
  • Planning permissions for the proposed development.
  • Your development approval in place.
  • The CV or resume of your development builder and property manager.
  • Information on your pre-sales and your business plan.

Free Brick Workers at Construction Site  Stock Photo

Obtaining finance for property development through Diverse Funding Solutions

Financing a real estate development through commercial lending is more complicated than residential lending. This is why it’s so important to work with professionals who have a proven track record at providing property development finance.

At Diverse Funding Solutions, we work with over 200 private lenders to provide property development finance for novice developers right through to experienced developers.

Working with DFS for your development finance means accessing:

  • No (or minimal) pre-sale requirements.
  • Minimal documentation requirements.
  • No credit checks.
  • Minimal equity/deposit requirements.
  • No property development project experience required.
  • Terms and repayment schedules being tailored to project needs.
  • Fast-tracked approvals and settlements Australia-wide.

If you’re looking to finance property development projects, we can help. To access genuine service and advice on finding the most suitable commercial or residential development loan, contact the team at DFS.

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