The Sources Of Finance For Property Development

The Sources Of Finance For Property Development
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Whether you are already developing property, or are planning to do so – or even looking at investing in one – then if you aren’t using your own cash you will need sources of finance for property development and purchasing.

Along with high street offerings, the alternative lending market can appear to be complicated and very large.

This article will highlight what types of finance are available, though a lot depends on your circumstances and the investment project you have in mind.

Commercial mortgages

You can use a commercial mortgage to buy commercial property such as warehouses, offices and shops. Essentially, anything that isn’t a private residential property.

A commercial mortgage works along the same lines as a private mortgage does so you can spread the cost of the property purchase over the years you want the mortgage for.

We found that commercial mortgages can work well, but if the property is up for auction, the timeframes involved mean you’ll at least need a bridging loan to cover the gap between winning an auction property and getting the mortgage funds in place.

Buy to let mortgages

For a landlord wanting to invest in a rental property, or indeed more than one, then you can access a buy to let mortgage. There are tougher criteria now when applying and lenders will look closely at the viability of the property for rent.

Some lenders will also offer one mortgage on a property portfolio, which will reduce arrangement fees and you only have to deal with one lender.

Landlords with a portfolio can also utilise the equity in their properties to access funding more easily so they can buy more buy to let properties or to refurbish the ones they have.

Just as we mentioned with commercial mortgages, in our experience, buy to let mortgages work well for properties on the open market, but not so well for auction properties.

Whenever we found a buy to let opportunity at an auction, we had to secure our initial finance outside of the mortgage provider, even if we would then move it to a mortgage later.

Mortgages are still widely used as a financing method.

Bridging finance

Bridging loans are a type of ‘alternative finance’ and are growing in popularity because they are easier to access than a mortgage from a high street lender though they tend to be for one or two years.

A bridging loan can be used for just about any purpose and you will need a security property to access them – the money can be used for buying or developing a property that may not otherwise attract a mortgage.

Bridging finance tends to be more expensive because they are quick to access – usually in less than two weeks though some lenders can deliver the money in a few days which makes them attractive for those who want to buy a property opportunity at auction and have the loan in place to meet the auctioneer’s deadline.

Essentially, those are the basic ways for financing property development, so you either have the cash to invest or to carry out any work or you will need to borrow the money from a high street lender or opt for bridging finance.

When we were starting out in property investment, bridging finance was our main source of funds as we were looking for low-priced auction properties. We met with a specialist bridging finance broker who was able to analyse our situation and recommend the best route forward.

We left his office with a firm idea of how much we could spend on the first property, and how long we would have to repay the funds.

This then allowed us to go off and research the availability and timeframes for getting a mortgage, though many mortgage providers won’t lend until major work on the property is complete.

With that in mind, we often found that time it would take to secure the property, complete the work, and secure the mortgage, would significantly eat into our potential profit. That made the first few investments very difficult.

However, once you get the first few done and have money in the bank, it starts to get easier (and cheaper!).

What is property development finance?

There are lenders willing to offer money to develop a property for up to two years to cover building and refurbishment costs.

There are a range of finance options with some lenders offering the opportunity to convert the original loan into a mortgage once the project is complete.

This is the case for the properties that will not attract a mortgage or need renovating before a mortgage lender will offer a loan.

What are the sources of housing finance?

Depending on the project, the sources of housing finance will vary with most projects being covered by either commercial mortgages or bridging finance.

However, it may also be possible to access funding from government or local authorities, depending on the type of housing that you are looking to finance, particularly if it’s aimed at social housing.

There are also investors looking for housing schemes and projects to finance with a view to taking an equity stake for funding a project and we will cover this more in property crowdfunding below.

How do you raise finance to buy property?

Whichever source you decide on, make the most out of it by negotiating.

Along with accessing your savings, asking friends and family to invest, the most common way to raise finance to buy property will be to access a mortgage or bridging finance.

If you don’t have a good enough credit rating or any enough equity in a security property, then you need to be more creative in raising finance and may need someone to stand as a guarantor if you’re accessing, for example, a buy to let mortgage.

For many, this will be the easiest way to access funding for property development though the risk in your success is with the guarantor.

How to start property development with no money?

For many potential property investors and developers, their ‘million-dollar question’ is: “How to start property development with no money?

In an ideal world, we would all be accessing this type of finance deal but this opportunity will not fall into your lap, so you could:

  • Save extensively – reduce your day-to-day expenditure so you quickly build-up savings
  • Ask family and friends to help you invest in a property development
  • If you own a home, borrow against the equity
  • Access a 100% mortgage
  • Property crowdfunding

We were lucky enough to have a small amount of money we could put towards our first investment, but it still made it difficult to get started. So, make no mistakes about it, while investing in property with no money is possible, it isn’t easy!

Is property crowdfunding an option?

We’ve mentioned property crowdfunding twice now, so is property crowdfunding an option? The answer is ‘Possibly’.

For those who may not appreciate it, crowdfunding is a way to fund your property investment by raising money from a large number of investors.

The attraction is that you use a property crowdfunding platform with each investor only investing a small proportion of the money you need.

Lots of investors and firms use crowdfunding as a way to fund their property development projects and one of the benefits is that by having lots of investors you reduce your exposure to risk. (As do your investors).

If you are buying a property, then you’ll need to calculate the various costs, including legal fees, stamp duty, as well as project management costs for the property’s development. Remember too that any profits or future rental income will need to be divided between all investors.

We’ve found that property crowdfunding is an enjoyable way to invest in property but we did find it difficult to sell our shares when we wanted to.

On the whole, we’d suggest this type of investment is a decent option as part of a bigger strategy, but we found it difficult to make the kind of significant amounts you can from investing directly in property.

For some, property crowdfunding is an ideal solution to access property investment and development with little financial risk but you will need to convince potential investors that you have a sound investment and you are the person to deliver it successfully.

As mentioned, the sources of finance for property development are varied and there are lots of lenders willing to invest, but a lot depends on how you approach the task, the project you have in mind and the amount you are looking for. Good luck!


  • Steve Lumley

    Steve Lumley has years of experience writing about property. His output has covered everything from property investment, news for landlords and student tenants to articles on how to run a successful portfolio and starting out as a property investor. He has also written several books on the subject.

    View all posts
  • Paul James

    Paul James, is a marketing expert with a passion for property. As well as being a property investor, Paul has also worked within the marketing departments of some of the UK’s leading estate agents. Paul is the founder of Property Road.

    View all posts
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