Easy Methods to Raise Funds to Build your Property
December 17, 2020
In this time of uncertainty about the future, property development remains one of the more resilient investments. There are many options for raising funds to finance this, and given below are a few suggestions. However, for professional guidance in making the right decision, it is best to approach an experienced financial consultant.
Almost all financing is done through loans. A regular mortgage usually takes a longer time to obtain, but there are some other types of loans which offer more perks for property developers.
- Property Development Finance is a short-term loan used to develop either an existing building, with renovations and refurbishments, or a new build development. It can be for residential or commercial buildings. Part of the funding package is used to purchase the site or property, and the other portion is used to meet the cost of the build works. The latter is usually paid in a phased manner, during each stage of the development, as works are completed. An IMS (independent monitoring surveyor) engaged by the lender (but paid for by the borrower) will inspect the site at each stage to confirm the progress. An advantage of development funding is that the funds are available as and when needed – and the interest is limited only to the funds drawn and not to the total loan amount. To avoid delays in funding, the developer should give sufficient notice to the IMS for the next inspection. The repayment is made usually by the sale of the project or mortgage finance.
However, development exit finance can be used as soon as development is completed but not yet sold. The exit finance can allow extension of time for sale, and also the project can be used to increase borrowings before the sale, to finance a new project. It has a lower rate of interest compared with the initial funding. The interest is not paid monthly but added to the principal loan amount outstanding. Repayment is made when all units are sold.
- Interim Financing: also known as bridge loans provide quick cash flow, but they are secured loans and require property as collateral. If there is a gap between the purchase of one property and the sale of another, a bridge loan can come in handy. By rolling the mortgages of the two properties together, the buyer has flexibility before the sale of a property. Bridge loans usually are faster to obtain, but they are generally short-term loans with large origination fees and higher interest rates. Most bridge loans do not charge exit fees if repayment is made early. However, interest will be charged for late payment, and the lender can redeem the property if the loan is unpaid.
- Auction Financing: For developers planning to purchase property at an auction, this loan would be helpful. It can be used to buy property in any condition and is faster to obtain than bridging loans. Since an auction purchase needs to be fully paid within 28 days, an auction loan can assure the payment in time. Usually, a deposit of 10% of the value will need to be paid at the auction site. However, the interest rates will be high, and a maximum amount for the bid will have to be agreed on beforehand with the lender.
- Conclusion: As with most loans, the lender will need to check the credit rating of the borrower. Documentation will need to be provided as evidence. The amount of the loan will depend on the LTV (Loan-to-Value) ratio, so sometimes only a significant portion of the cost will be covered by the loan. All legal aspects will have to be looked into, and the budget should include not only the cost of the property and building/renovation costs but the various professional fees as well. The experience of a professional financial consultant is essential. Guidance in choosing the right method of funding to suit individual requirements will ensure that the property is built on a strong foundation.
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