This is part one of a two part series, this deals with general rules when seeking finance, part two tells you where to go and the types of fiance available.
So you’ve found your dream development project…now all you need is the money to buy it! In today’s market it’s not easy to raise finance – but if the profit margins are there, people will listen and lend.
Property Development Is A Business
The first rule is that property development is a business. Businesses exist to make money and that must be your focus. You must continually question yourself and your plans to ensure you are going to make your projected profit margins. Forget the TV shows and stories about how glamorous property development is – forget the future lifestyle you are dreaming about. Fundamentally you are in property development to make money. Stop dreaming and start doing.
Get A plan
The next step is to draw up your business plan (Read this blog if you need advice on writing a business plan.) Your business plan is your key to raising finance for your property development. The business plan should be in place for each and every property you are thinking about developing. Write down all your findings – no matter how well you think you know it – writing your plan down clarifies your thinking, gives you focus and highlights any potential pitfalls. It is easy to get carried away by the excitement of a project and a business plan keeps you grounded and on track.
It should detail the area, the reasons why you’re buying, the current supply of properties on the market and the demand for properties in that area. You will need to talk to local agents about the market, research house prices, check land registry figures and be aware of what is happening in the wider market (e.g. employers, schools and transport in the area).
Note down anything that may impact upon your property sale. Think about your target sale market and if anything is happening which may influence them to buy or not buy your property. It doesn’t need to be, long but it should show a proven market for your product.
Run The Numbers
Now you need to get down to the nitty gritty of the numbers. The number 1 rule is not to massage the figures to suit you. You may have found (on the surface) a great opportunity – but you need to make sure the figures add up and that you are going to make money. There is no point doing a development project where you work for free.
Include all the costs of the development and a profit margin for you. Get quotes together for the work you plan to undertake, the financing costs of the development (including paying interest on the loan while you are doing the works), buying, selling and legal costs.
Also factor in what you are going to live on while you are doing the development work. Many developers will take their wages at the end of a project when it sells – however it is important to note that the costs are front-loaded- you will need to have money ready to support you and live on while you are doing the project.
Your living costs and bills will still need to be paid during a project and this has to be accounted for if you are working full-time on a development project. This is often over-looked and can be the downfall of many projects.
Profit Or Loss?
Be clear about the profit involved. Remember to cost for your time – unless you want to work for free! Is the development worth the time, risk and money involved. Quantify what the different risk factors are and price for them accordingly. Everything boils down to risks and reward. Ensure you have the right balance of risk to reward in a development project.
Get The Finance
Once you have your business plan in place you can start approaching people to discuss raising finance for the project. Business plans should be easy to read and understand – and highlight the figures of the project. There are several places you can go:
• Specialist Mortgage broker. There are some specialist development mortgages out there (e.g. The Mortgage Works) which allows you to borrow and develop the project. Specialist development banks have also entered the market (e.g. Aldemore) which allow development project finance .
• High street bank. Some banks such are lending on development projects. Arrange an appointment with a local bank manager, take your business plan with you and show them what you are looking for. Commercial lending does exist for development projects.
• Friends and family. You may be surprised how much money some of your friends and family have stashed away in the bank and who are willing to lend on a project. The key is in ensuring you show the business plan and treat any funds they lend as a business arrangement. Offer a good rate of return for any money lent, or possibly a profit share.
• Joint venture. There are a good number of people who are looking to collaborate and combine financial resources and knowledge. Most times, this will involve some sort of profit share. Get to know people in property, so you may get talking to someone who also wants to share the financial risks and rewards of a project.
Finally, always remember that property development is a business. Raising funds is part and parcel of any successful business. Your business plan is your manual on how you will make money. Get this right and you will soon be on your way to building a successful property development business.
This blog is a two part one, you can read part two here about specifically what lenders expect from you. We can obtain property development finance for you, check our property development finance page here.
Since this article was written many developers have had big problems with existing bank loans being called in at short notice. If you need help please check out our commercial write down page.