A major challenge that new entrants to the property development business face is securing financing. A property development business needs a substantial amount of funds to purchase good investment properties (residential or commercial) with potential for great returns.
Property development involves a wide range of activities and processes from purchasing land to building and developing facilities and developing them to yield good sales or rental returns. Some examples of property development projects that a typical business would invest in is the conversion of old houses and office buildings into student communes and apartments. Property developers can also develop a plot and build new homes or flip an existing property for resale.
Funding for Property Development Businesses
On a business level, whether it is buy-to-let or for development purposes, entrepreneurs may look at funding through a bond from a bank, a specialist finance company or through private investors.
Before taking out a loan it’s important to first establish how much you can borrow and how you will be able to manage all associated costs of the development.
Banks and specialist finance companies may consider a number of factors before granting you a loan. This includes whether you have a good credit record and financial track record, and they may also require that you to pay a cash deposit.
- Banks offer property finance in the form of a loan to developers, owners, occupiers and investors.
- Specialist finance companies provide access to a construction development loan/facility to kick start, construct and complete a development project.
- Private investors such as angel investors, friends and family, crowdfunding platforms etc. may be able to fund your property development project.
- Co-investors, pool funds with co-investors who then get a share of the profits.
- Home equity refers to the portion of capital in your home loan that you have already paid off. It can be used to fund a second home loan on your investment property.
Read more: A Simple Guide to Angel Investors
Financial institutions may request a borrower to put up some of their money to finance the property purchase. Lenders typically offer bond applicants 90% to 95% loan to value (LTV), while requesting borrowers cover the balance as a deposit.
As part of the planning stages of purchasing a property to develop it is essential that an investor put aside enough funds to cover construction and refurbishments costs of the property and any unforeseen issues which might arise.
Other costs to consider are: turnaround costs (transfer duties, fees, moving costs), special levies, insurance, inspection fees, permits, marketing expenses, etc.
How to successfully access financing for your property development business
First-time investors can increase their chances of securing funding by running professional enterprises.
It is important to remember that property investors are entrepreneurs, says Grant Smee, Managing Director of Only Realty SA and the founder of EPiC Networking and OUST Eviction Management Solutions.
“Investing in property is like owning a business and as such, transactions, management and administration duties will be constantly required.
“First-time investors who are unfamiliar with the requirements of these responsibilities should seek advice from industry experts.
Related: Starting a Business in South Africa