Investing in a site for property development requires a great deal of funding. But before you work on securing any financing, you need to consider a few things, from funding options to choosing the right lenders.
Here are four key property development financing factors you should know about:
1. Whose Cheaper – Bridgers or APR Lenders?
Although the rule of thumb is that cheaper seeming lenders often end up being substantially more expensive, that equation doesn’t work both ways. As such, you shouldn’t rule out more expensive seeming lenders before doing your homework, as they can work out much better in the long run.
Borrowers frequently look at monthly ‘bridging’ interests of 1% per month, quickly equating that to 12% a year, and come to the conclusion that that’s much too expensive for them.
That’s not necessarily the case though. If the loan interest is calculated based on the drawdowns, then the annualised rate will be much closer to 7.5%, based on 9 equal drawdowns and a 12-month loan. Many bridgers also boast small to no exit fees, meaning that the initially cheaper development funder of 7% with 1-2% of GDV and 2% arrangement fee comes the same overall cost when compared to the bridger.
If you don’t want to be paying exit fees, and GDV based exit fees are off-putting in particular, a bridger can prove to be the ideal avenue to go. For loans over 12 months, bridgers can become increasingly expensive, especially after the 15 month point, because their monthly cost is effectively twice that of the development lender, proportionally.
For short loans under 12 months, bridgers are well worth considering, but you should definitely bear in mind that both options have shortcomings and upsides, and it’s up to you or your trusted professional to eke those out.
2. Don’t Simply Go By the Interest Rates!
When you’re selecting lenders, you should never ever simply go by their posted interest rates. These are deceptive, can be misleading, and the best looking ones always come with a costly caveat. However, as a form of advertising, a deceptively low interest rate works, so the lenders keep doing it.
It can be difficult to get a full grasp of what’s standard and available within the property development finance arena of the lending industry, especially without fixed prices and easily visible interest rates.
This is why you end up with borrowers going with the first or second low interest rate option they see. It’s really a case of doing your due diligence, and researching and comparing the lenders as much as possible, rather than simply jumping on the first obvious choice because of a juicy low interest rate.
We can help when it comes to the three different ways of calculating interest, and how to sort out the arrangement and exit fees to give you a wildly better borrowing situation. Show us three seemingly similar loans of 7% per annum interest, and we can give you at least 3 wildly varied interest costs, without even looking into fee structures.
Many funders utilise exit and arrangement fees, but some now base it on the GDV of the loan, meaning that some 7% loans can come out as expensive as 15% per annum.
3. Getting Funding with no Equity Stake or Deposit
Starting out as a developer without any liquid assets available may seem a daunting prospect, but there are a few different ways you can start on a project without any initial cash.
Equity investors can produce the cash for you. With so many crowdfunding and angel investor websites out there, some are even specifically catered towards property investment. Equity investment or crowdfunding could be the way to go for you.
If you have a potent asset situation behind you, certain lenders won’t ask you to put down cash. If your portfolio is big enough some lenders are willing to take charges over properties equivalent to the amount you’re asking to borrow.
Finally, you could sell units to off-plan investors. Pre-selling via an investment company can allow you to get the initial seed-money to get your project off the ground.
4. A Different way to Assess Lenders
When it comes to assessing lenders there are many other considerations beyond rate. Many property developers aren’t fazed by rate, as they prefer the minimum cash stake levels going in, whether that’s because they have low cash levels, or because they want to spread their existing cash over many existing projects at the same time.
It’s a mistake to think that lenders boasting a higher maximum loan to GDV percentage, as well as those higher maximum loan to cost percentage are cheaper, due to them allowing borrowers to borrow more money and pay less initially. It’s always going to be a case of striking a balance between how much cash you are willing to initially put down, and how much interest you want to be paying.
It’s worth considering this before you invest in a site, as it allows you to select your lenders with a little more scrutiny.