Raising the cash for development projects

Self-building a development project to rent from scratch is viable investment project for many landlords with plots of land – but how do you raise the cash.

The problem is not many banks or building societies want to lend on what they see as risky, speculative projects in these days of austerity and restraint.

So where do property investors look for development funds?

One obvious source is remortgaging from existing property to raise some or all of the cash.

Standard buy to let and home mortgages are still out there, providing the borrower has an unblemished credit record and a large slice of equity – certainly 25% or more of the property value.

The other plus is interest on property business loans is a tax set off as a business expense.

If this avenue is closed, where’s the next port of call?

Short-term lenders – who used to call themselves ‘bridging lenders’ – will consider development projects at high interest rates that come with a hefty fee at a safe loan-to-value of around two-thirds of the value of a property.

The lender will want to see an exit strategy – and that’s not plans to sell or rent, but a loan offer from a mainstream lender that will take out the short-term loan when the project is completed.

Development loans also come with other caveats.

The money is released in dreaded stage payments which can stunt cash flow and even lead a project to stall or end abruptly.

Typical stage payments are made on:

  • Buying the plot
  • Completing the ground works
  • Finishing the property shell
  • Completing plastering and fixings
  • Completion of the project

The property is valued at each stage – and that’s where the problems can come if prices are stagnant or falling, because the lender may not be willing to release as much money as the developer wants or expects.

That’s why many developers work with a contingency fund of up to 25% of the project value to fall back on.

Certainly house building is profitable to rent or sell for investors, as a DIY construction project costs significantly less than buying a new build, but that margin for gain comes with extra risks as well.

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