If you’re entering into the property developing world for the first time, there’s going to be a lot to learn. Of course this is the case if you’re dipping a toe into any sort of new industry, but with property there are a few key things that it’s essential to get to grips with. The return on investment (ROI) is potentially a high one, but in order to get there you have to have all of your ducks in a row. Market research, finding a good property lawyer, engaging a reputable architect if necessary – all of these will boost your chances of making a successful venture in the property developing world.
The very first thing to do as a developer is to work out how you are going to fund your project. Unless you are fortunate enough to have large cash reserves – enough to complete the build/renovation as well having enough to see you through day to day life until you start seeing an ROI – then you’re looking at taking out finance. And not just any sort of finance. High street banks offer the facility to take out a property development loan, but they aren’t specialists and as such you probably won’t find very good rates. It’s far better to have a scout around with lenders who do specialise in property finance and find someone who will suit your project – and budget.
Spot the difference
Bridging loans and property finance loans are separate types of property finance and they shouldn’t be confused as one and the same thing. They are both viable and suitable routes for getting your project to market but be careful to understand the differences, and the different situations they are used in, before you go ahead because going with the wrong choice could lead to costly mistakes – and no developer wants any more cost than strictly necessary.
Bridging the gap
Bridging loans are commercial loans which are designed to fill a short term gap. They provide funds quickly if you have agreed deadlines to meet and cash flow problems. This type of loan can typically be accessed in just a few days, making them ideal as an emergency measure. Situations where they might be appropriate to use are:
- To complete renovations on property before it is sold/goes on the rental market if this needs to be done quickly.
- To cover an urgent need for business funds.
- Purchasing properties at auction which are below market value.
Basically, bridging finance is a perfect solution where a borrower needs access to funds in the shortest possible timeframe to meet time critical deadlines for urgent property construction.
The downside to this type of finance is that it tends to be a more expensive option than development loans. Because it’s essentially a loan of convenience, lenders can whack higher interest rates on them and borrowers are powerless to avoid them.
Development finance
There are a few differences between these types of finance, but one of the key ones is that funds borrowed development finance are exclusively for use in property development. Whereas bridging loans are available for use in more general situations.
Development finance allows a larger sum of borrowing – there’s usually no upper limit. This can mean that you can fund multiple property projects, you can expand just one project further than you would be able to without finance, and you can keep your cash reserves back for personal expenditure or to invest elsewhere. It’s very much a ‘not having all of your eggs in one basket’ scenario.
However, it can be a lengthy and detailed process to have to go through so it isn’t suitable for developers needing funds in a hurry. There are no punitive interest rates, but it is a much longer wait for the money to come through than with bridging loans. Typical examples where development finance might be used are:
- Extending or re-purposing an existing property or development
- If you are in the midst of – or planning – a major construction process.
- For covering some, or all, of the developing/conversion costs.
Another key difference between these alternative methods of property finance is the way in which the funds are released. With a bridging loan the entire amount is usually in your bank within days, subject to approval.
Whereas with development finance the whole amount is released gradually over the course of the construction/redevelopment phase. There might be an initial sum upfront to fund the purchase of property or land, or to pay off existing loans, but you won’t get the whole amount quickly. Once the project is underway there will be a monitoring surveyor who comes out periodically and they will examine the works to date, make sure everything is being done within the agreed time limits and look out for any mistakes or potential problems. Once they are satisfied and this has been fed back to the lenders, a drawdown payment will be issued, equal to the cost of the works for the last month. So though a development loan potentially gives access to a greater amount, it is a more fiddly option and you have to be prepared to receive the money in stages.
Though both are flexible in terms of the loan arrangements, bridging loans are taken out over a much, much shorter timeframe. The typical term will be between 6-18 months, compared to a development loan which can run for a term of several years.
As always, don’t rush a decision and consider your situation carefully. If you’re unsure at all then talk to a experienced, reputable broker who can give you advice tailored to your specific situation. It’s a good idea to compare the loans from countrywide lending specialists because this will put you in a much better position for making an informed decision. After all, this is your personal project and any mistakes made will be yours to deal with, and could be a damaging blow to your cash flow, so keeping an close eye on every single detail is absolutely essential.
