Property development can be an exciting venture, but it’s important to remember that it’s not a hobby: it’s a business. Approach it with a mind to making money, otherwise you’ll have trouble in convincing others that you mean business and possibly fail in securing the finance necessary to fund your development.
Putting Together a Business Plan
A solid business plan is the cornerstone of any successful property development; it will serve as your manual on making the project profitable, and is absolutely vital in securing property development finance from any lender.
Having a proper business plan in place can help clarify the project in your mind and keep you grounded in your excitement. It should detail all your findings, including every scenario that could impact the sale of the property, and it should highlight all associated costs and pitfalls.
Specifically, you should detail the area of the development, why you feel it’s worth investing in, the supply and demand of properties currently on the market in the area, current housing prices, and land registry figures (information pertaining to the schools, employers and transport in the area).
Your business plan should detail every aspect of the development, from start to finish; it’s your strongest weapon in securing finance and should therefore be easy to read and understand, and provide an accurate vision of the projected profit margins.
Crunching Numbers and Assessing Profit Margins
No matter how much you want the project to work, you’ll be doing yourself a great disservice if you manipulate the numbers in order to secure property development financing. If the numbers aren’t feasible, you’ll be the one who suffers, landing yourself with huge debts and with a monstrous, unfinished project on your hands.
To this end, thoroughly research the viability of the project, crunching all the necessary numbers and realising the pros and cons that go into such an endeavour. It’s imperative that you figure out if there’s a good risk to reward ratio, and whether or not it’s truly worth taking the financial risk.
When costing out the project, there are numerous things to consider: quotes for labour and materials; buying and selling prices; legal costs; loan interest rates; profit margins; and your own living costs if you intend to work on the project full time.
Securing Property Development Finance
Mortgage brokers and banks specialising in property development are your best bet for securing the appropriate finance required to complete the project. High street banks also offer commercial loans for business projects, although they can be harder to borrow from. The first step is to set-up a meeting with the bank manager and have him or her go over your business plan.
Friends and family with significant savings are also potential lenders, although it’s important to treat the situation strictly as a business venture in order to keep friendships intact. For your part, you should offer good interest rates or a share of the profits.
Joint ventures are another route to securing finance: by teaming up with someone else in the business of developing property, you can pool your money together and split associated costs; the risks and rewards are shared. If you’re new to property development, partnering with an experienced, successful developer will improve your chances of securing financing as some lenders may be apprehensive, or won’t give loans at all to new property developers.
However you decide to pursue financing, you must be sure to present a solid business plan with projected profit margins and costs; no one is likely to invest in your development otherwise.
Financing Fees and Criteria
Lenders have strict criteria when it comes to financing property development as it is a high risk, high reward endeavour. They will want to see a real financial commitment from you, to prove you are serious about the project, so you will almost certainly need to own the plot of land outright.
If you are successful in securing a loan from a commercial bank you can expect to be hit with a number of fees, including: a set-up fee; an exit fee; introducer fees; survey and legal fees; and in some cases, a percentage of the facility. Your lender will most likely loan 50-60% of the development costs, paid out in 4-5 stage payments – each payment being paid out after a site inspection.
If you’re serious about pursuing a career in property development then you must treat every property as a different enterprise. You must be sure to carry out the steps outlined above thoroughly, for each separate project, to ensure it will be worth your time, effort and money.
Cathy Livingstone is a freelance writer with expertise within the business and property development finance arena.