There are a range of options for getting finance for a property development.
Depending on the size of the development, you could take out property development finance, a bridging loan, commercial mortgage or even auction finance. Here we run through the pros and cons of each:
Traditional property development finance
For larger scale projects and considerable sums of money. An example would be a six-house development from scratch, for instance, or refurbishing a commercial property into residential apartments.
Pros
- It’s possible to borrow large sums of money
- This can be paid back once the development is completed and units sold on
Cons
- You’ll usually only get 70 to 80% of the build cost so will have to find the rest of the money yourself
- It’s only paid in increments ie after certain stages of the project are complete
- There is regular monitoring by an independent surveyor to make sure the project is on track
Bridging loan
For those who need money in the very short term – and for a short period – a bridging loan can prove a real lifeline. These are useful if a project goes over-budget and you need that little bit extra finance to complete it.
Pros
- Can help out when you’re in a financial hot spot
- Good for short term projects
- Quick to arrange, compared to a bank loan
Cons
- You’ll pay high rates of interest
- If you need it for longer it’d have been better choosing a longer-term loan with lower interest rates in the first place
Auction finance
For those looking to buy a property at auction but don’t have a lot of working capital, auction finance can be just the ticket. And, indeed, it is a popular funding option for many property developers. You find a property or properties you’re interested in, at a specific auction, and approach a lender for financing.
Pros
- You’ll know how much money you have to spend when you enter the auction room
- You won’t get 100% finance and may have to, for example, fund the deposit of the property yourself
Cons
- Criteria from some lenders about what you can buy can be pretty inflexible
- Credit checks etc can be lengthy – and you don’t have a lot of time with property coming up at auction
Commercial mortgage
This is when a seasoned property developer with lots of properties in their portfolio, combines all the buy to let mortgages (or at least a sizeable handful of them) into the one mortgage. That way he or she can benefit from economies of scale.
Pros
- Landlords can also save in arrangement fees
- There’s one point of contact (rather than multiple contacts for individual mortgages)
Cons
- Not suitable for first-time landlords or developers with no previous experience
Access 100% finance with Sourced
At Sourced Network franchise, it’s possible to borrow up to 100% of the money you need for a development project. That’s because you can get up to 100% of what your development will be worth (GDV – gross development value), via Sourced’s in-house funding facility, Sourced Capital.
Many developers have already benefitted from this, as you can see from our Sourced success stories. If you’d like your property project to be next, download a copy of our prospectus to find out more.
