Are you starting a new property development venture?
Property development can be a profitable business, but also an expensive one. It’ll take a lot of money to even get the land you want to build on, let alone getting your project off the ground. This is why a property development loan is often a vital part of your business plan. But knowing the best ways to secure a property development loan isn’t always easy.
That’s where we come in to help! Keep reading for these 6 tips on making sure your loan application gets approved.
What Is a Property Development Loan?
A property development loan is capital advancement given to borrows. Its purpose is to allow the loanee to break ground, build and hold onto the development until leasing.
Loan purposes for investors will often be one of two things. First, to buy a raw piece of land to build on. Second, to tear down an existing construction and build from scratch.
The 4 Most Common Types of Real Estate Loans to Choose From
This isn’t a list of all the loan options out there, only the most common that you’ll find on the market. These are (but not limited to):
- A development loan
- An acquisition loan
- An acquisition & development loan
- A construction loan
Depending on your needs, most of the time your project will fall into one of the above. We’ll go into more detail about each loan type below so you know their specifics functions.
An Acquisition Loan
The clue is in the name for acquisition loans, you’ll use it to finance the piece of land you want to buy. Usually, the land will be raw (undeveloped) with untapped potential.
More often than not, this loan will be to buy the land but there won’t be any intention to develop it. While this is a common type of loan, it offers very little wriggle room to do anything with the land.
A lot of the time, if you did want to develop the land, you’ll need to pair it with other loans. In fact, of all the loans out there for development investors, this type has the least freedom.
A Development Loan
Once you’ve bought the land if you do decide to move forward with building you might need a loan to afford it. This is exactly the point of development loans. To give the capital in advance to break ground and get the development up.
The loanee will take out a development loan to make improvements to the plot. This includes running water lines, making roads and accessways, and leveling the ground. It’s the loan you need to take a raw piece of dirt and turn it into a fully functioning building site.
Acquisition & Development Loans
When you have an idea of your development from the start, sometimes you buy the land and improve it at the same time. That’s what an acquisition and development loan is for.
As is their name, loanees taking these loans out will be able to buy the land and get the site running back-to-back. Of the types of development loans we’re looking at, this one offers the most flexibility.
A Construction Loan
Construction loans are what you’ll need to fund your renovation or new build. This loan is different from the other three above. With those, you get the lump sum upfront at that start to cover the initial outlay of the project.
Construction loans you get in monthly installments as your development progresses. The more money you draw out as the months go on, the higher your monthly loan repayments get, so bear this in mind. It’s prudent to have good control over build costs.
6 Tips For a Successful Property Development Loan Application
Getting the money you need for property development can be a challenge. The risk of crashing out is high with property development. Because of this, only seasoned pros can get these loans with ease.
Even then, that’s not always the case and they can struggle. For first-timers, it can sometimes seem like an impossible mountain to climb. No matter how willing you are to jump through lender’s hoops.
We’ve put together these tips to help overcome the difficulties of getting funding. We’re not saying it’ll be easy, but they’ll put you in with a real fighting shot.
1. Get Credibility & Experience
It’s a good idea to try and get experience in property development first. While this will add time to your plans, it’ll make you more trustworthy to handle a real estate loan.
These loans aren’t small personal loans, they can run into tens of thousands, even millions. A property development finance company (or any lender) will look to invest with people who know how to handle and budget at that level
They want to know you’ll use it well and can manage a project of this scale. To gain this credibility, work with a property developer who is already established.
You’ll gain the knowledge you need to run a large-scale development project. Not only will this give you the credibility lenders desire, but you’ll be thankful for it as you head out on your own.
2. Partner Up
If you already have some funds to bring to the table, partnering up can be beneficial. It also puts co-financing on the table. Most lenders will consider this a more stable option. With two or more parties co-signed, lenders consider there to be a lower risk of missed payments.
3. Have A Plan They Can’t Ignore
Getting a property loan could be easier if you’ve got a plan lenders can’t ignore. When starting, most developers bring small projects, with only one or two homes.
While remaining profit-minded, try to come up with something outside the box. Give lenders a reason to get excited about your project and its potential so they want to get involved.
Bear in mind that real estate loans can take months to complete. In that time, any property you had your eye on might already have left the market. Always have a couple of lots in mind and backup options.
Also, consider things like:
- Access easements
- Zoning limitations
- Utility easements
- Other special conditions
You need to put a thorough, comprehensive property development plan together. The better your plan, the more chance you have for lenders to trust you can handle a project.
4. Do Your Research & Due Diligence
While putting your plan together, do your due diligence and research. The more extensive the information is about your project, the more attractive it is.
Look into the local property market and speak with realtors to get an accurate unit price. Get your estimates together for building costs. This should include overhead, materials, labor, and any profit.
5. Keep Your Costs as Low as Possible
When it comes to applying for property development loans, you’ll do well to keep the costs as low as you can. The lower your costs are, the more profit you’ll bring in.
Lower costs are also more attractive to banks and finance companies. When banks offer debt, they’re focused on two numbers:
- The percentage of projected costs total
- The percentage of completed project value
Repaying a development loan isn’t easy during the building process. Because of this, it ups the risk and can make lenders fidget. Keeping project costs low helps ease some of that concern. If things go wrong though, the lenders won’t be forgiving.
6. Practice What You’ll Pitch
Once you’ve got your plan together it’s time to rehearse and prepare to pitch for your loan. This isn’t a time to wing it and hope for the best. Take that plan and express with confident conciseness. You want to convince lenders you’re the one to take a chance on.
Make sure you’re ready to field questions about the land, the plans, or the costs. The more on-the-spot information you can give, the more you’ll appear to be in control. This gives confidence and lenders will be more likely to give you your loan.
Best Real Estate Development Loans
When looking into sources for real estate loans you need to weigh up some factors:
- Costs
- Approval speed
- Qualification requirements
And more. Make sure you’re evaluating the variable that comes with loan offers and shop around. You want to pick the right financing option for your current situation. Here are some places to get started.
US Bank
Loans through US bank are a good option as you can loan up to 80% of the property value. You can get fixed or variable interest rates to suit your needs. Repayment terms can be as long as 25 years too.
JP Morgan Chase
JP Morgan Chase offers real estate loans to several developers every year. They tend to focus on property in the range of multi-family and mixed-use units. Their streamlined qualification and application process is a huge bonus though.
Wells Fargo
Wells Fargo is one of the biggest sources of property development funding in the US. If you get approved, you could have access to funds as fast as 4-6 weeks. On top of that, compared to other lenders they’re less concerned with the loanee’s credit.
Liberty SBF
If you’re looking to borrow up to 90% of your property value, this is a good option. Their loans are flexible, and you can make them up out of three portions. Your downpayment is one, development companies are second and traditional lenders the third.
SmartBiz
SmartBiz aims to match investors/loan providers depending on the specific project needs. They focus on quicker financing, though they tend to have high qualification requirements.
Property Development Loans: Know What to Expect
When it comes to property development loans, it’s important to know that you’re up for a challenge. There’s a lot of risks involved in funding developments, with many never completing.
Consider your funding needs and the ongoing needs of the project. Do your research into the local market to come up with solid, attractive figures. The more thorough and detailed you are the higher your chance of approval. Give lenders a reason to trust you with their money by showing them you know what you’re doing.
If you found this article helpful, be sure to check out our other blog posts for more.