Property development is one of the most exciting ways of becoming your own boss. Property development is all about buying at the right price, adding value and selling for a profit but all that is easier said than done. However you first need money to make money. Financing your first crack at property development is the hardest as it’s unlikely you have ready access to a large amount of money. In this post I’ll look at how to secure the initial finance to begin developing property.
Apart from the sale price of an existing property or the land to build on you’ll also need money for professional and legal fees associated with the purchase and securing finance, the building work, the mortgage repayments, utilities, labour costs and insurance. Depending how you get the money for the development you may need up to 40% of the total cost at your disposal already. Check out all your options below:
A mortgage is one of the most common ways to finance a first foray into property development. A mortgage differs from other loans by using property, either an existing property or the one you plan to build, as security aka collateral for the money lent. If you fail to repay the loan then the property passes to the lender.
When seeking a mortgage it’s imperative to use a mortgage broker. There are two kinds of broker; an independent broker who isn’t affiliated with any mortgage firms and a ‘commission-tied’ broker who will only sell you a package that they will benefit from. Charted accountants can act as independent brokers, providing property investment accounting to help you secure finance at the best rates.
As I said earlier, while property development is exciting it’s also risky (perhaps one of its appeals for many people). The property market is a volatile sector, made even more so by the rocky economic climate in general. When securing finance from a bank or mortgage company the state of the market and future predictions for the rise or fall in house prices will affect the rate of lending you receive. Your lender will conduct their own research into the current risks and provide better rates when less risk and greater profits are likely.
Property builds or renovations inevitably incur delays for one reason or another which can be filled with risk if your budget lacks elasticity. A tight budget is important but you must have some flexibility for cash sucks like delays. If you don’t have any stretch in the budget you may end up having to give up the project altogether, accepting a loss in profits to avoid total bankruptcy.
That said the risk can often pay off. Take time to consider the current property market, find the right development and consider how you can add value. If the conditions are right take the leap!
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