Property development refers to the process of improving or developing vacant land to maximise its value. It is a popular way for investors to accelerate their profit rather than waiting on the market to raise capital growth. But, how can investors raise finance for a property development if they don’t have significant working capital to cover cost? This is where property development financing options come in.
In this article we aim to provide a brief guide for property developers and builders looking to finance the construction of their next project (excluding cash or personal loan options).
What is property development finance?
Naturally, investors need to provide developers with working capital in order to begin the process to start development. This usually happens in the form of short-term, high-interest loans from bank or other non-bank lenders. There are very few investors who can, or want to, fund a development upfront without relying on finance.
There is not a one-size-fits-all approach when it comes to financing property developments, and knowing your borrowing capacity, your project and timeline and being aware of major rules and regulations is key in a successful finance strategy. What loan product is best suited for your development will largely depend on your project plan and feasibilities, as well as the assessment criteria for various finance products.
Luckily, there are various loans or mortgage sources you may be eligible for as an investor:
As the name implies, this specialised mortgage can be an option for investors looking to generate rental income from a property development. With a buy-to-let mortgage you will be able to rent out your entire residence or even just a room if you prefer. The criteria for this type of mortgage varies from your standard residential one however, and is offered on an interest-only basis. Many lenders also require a high deposit, sometimes up to 40%, as well as costly fees.
If you are interested in a rapid turnaround after your property renovation or alteration, applying for a buy-to-sell mortgage will allow you the flexibility to sell. Standard mortgages generally bind investors to 2+ years before allowing for a property sale, thus with a buy-to-sell option you can accelerate that process. It’s likely you have to put down a bigger deposit for this finance product, as they usually attract above-average fees.
Typically, bridging loans help to “bridge the gap” in funds when you want to buy a new property but you haven’t yet sold your current house. They are especially useful for short-term arrangements and usually come with monthly fees rather than annual interest rates. Bridging loans can be either open or closed, which dictates the payback period. While these types of loans are costlier to hold than a standard mortgage, bridging loans are available on more properties than your run-of-the-mill mortgage.
Specialised property loans:
Private lenders often offer investors so called specialised property loans. There are several sources that focus on raising money for construction developments, and individual brokers who can manage the transaction. Even though often handled privately, specialised property loans are still subject to regulations from the financial conduct authority.
How to apply for property development finance
So, you’ve researched your options and found a finance product well suited to your development project. How do you then apply for property development finance in Australia? Like with any other loan, the first step to securing finance is to complete the loan application form or submit a project proposal. Many lenders will ask for:
- A fixed-price construction contract
- A project feasibility study
- Relevant DA approvals (BA/Op-works approval or construction certificate is ideal)
- Borrower details e.g. statement of assets and liabilities, financial statements
- Substantiation of the borrower’s background and track record in construction and development.
When applying for a construction loan, it is important to be open and upfront when negotiating with a financier. Comprehensive due diligence is a standard part of the loan assessment process, so any information not disclosed may not be covered.
Finance with Assured Management
Assured Management (AML) is a flexible, non-bank lender with the ability and expertise to work directly with property developers to complete projects in a timely and profitable manner. We provide tailored construction finance solutions for:
- Housing estate developments
- Unit blocks
- Townhouse development
- Land subdivisions
- Commercial and industrial premises.
- Investment properties
To apply for a construction loan please contact AML and speak directly to the loans approval team by phoning (07) 5578 6177. You can also send through your enquiry online.