Property development is becoming an increasingly popular investment opportunity. However, with this potential for high returns comes a higher level of risk. Property development is a longer, more complex, and often more expensive journey compared to standard property purchases, but the rewards can be substantial.
When we talk about property development, we’re referring to any form of extension or modification of your physical property. This could be an indoor renovation, building a granny flat, adding an extension to your home, or even constructing the first building on an empty block of land. Financing a property development, especially when buying land and building from scratch, can be a mammoth task. Here’s a breakdown of your options when financing such a project.
Major Loan Options for Property Development
Each stage of the development process may require a different type of loan. There are three primary loan types that are commonly associated with property development:
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Development Loan: This loan covers the costs of purchasing the land and any pre-development expenses.
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Construction Loan: A loan that applies specifically to the costs associated with the actual construction of the development.
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Investment Loan: A loan designed to fund holding the property for long-term investment purposes.
Typically, you’ll begin with a Development Loan, which can then be bundled with a Construction Loan to finance 60 to 80 per cent of the total project cost. This includes everything from purchasing the land to completing the development. Much like a standard home loan (but with additional paperwork), you can borrow between 60 and 90 per cent (sometimes more in special cases). However, you will still need to contribute some equity, usually between 20 and 35 per cent of the total cost.
Submitting for Your Loan
The most challenging part of financing a property development is the loan submission and approval process. While obtaining a regular home loan involves some paperwork, it’s relatively straightforward. For a development loan, however, things become more complicated. You’ll need to provide detailed projections on costs, timelines, and potential returns.
Here’s a list of what you’ll typically need to submit:
- Land details: Information on local zoning laws and the current status of the property.
- Development concept: A clear explanation of the type of development, whether it’s a new build, extension, or renovation.
- Price breakdown: The cost of acquiring the site and the development costs.
- Estimated returns: Projected sales value or rental returns.
- Timeline: A breakdown of key milestones and when they will be achieved.
- Financial position: Your current financial standing and the loan amount required.
- Credit history: A report on your financial stability as a developer.
Lender Valuation and Approval
Once you’ve submitted your application, the lender will conduct their own due diligence. This involves checking the accuracy of your projections and assessing the overall viability of your development plan. In most cases, the lender will hire a valuer, often at your expense, to inspect the property and validate your plans.
The valuer’s job is to ensure that your project is realistic and the expected returns align with your forecasts. Following this, the lender will review all the information and decide whether or not to approve your loan.
Final Thoughts
Property development can be a rewarding investment, but it’s essential to understand the complexities involved in financing such projects. By preparing thorough documentation and ensuring your projections are accurate, you increase your chances of securing the right loan.
If you’re considering property development and need more advice on financing, feel free to get in touch. At Agent Team Real Estate, we’re here to guide you through the process and help you make informed decisions for your investments.
