Easy? Nothing usually is! However, there are accessible methods to raise funds for property building and development.
Sometimes, constructing your property can be less expensive than buying one.
The finance required will depend on the investor’s intended scale and scope of property and of course, the budget for the same.
To choose the best method of funding, reliable and expert financial consultancy will be essential.
A few suggestions on property development finance are given below, and the right advice from a consultant can guide you with clarifications and explanations to make the best choice.
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Construction Loans
These are short-term loans to finance the construction of a property.
The security will be the property being constructed.
The funds are usually disbursed in phases, on completion of each stage of the project.
Once the construction is over, the repayment is made by paying the loan in full, or by a combination loan, which starts with a construction loan and then becomes a permanent loan.
A rather large deposit is required.
However, many such loans are interest-only loans, so interest is paid monthly only on the money borrowed without paying part of the principal loan as well.
Bridge Loans
These are also short-term bridge loans, used for a down payment for a new house before another house is sold.
It is based on another property standing as collateral.
The amount of the loan is usually based on the combined value of both houses.
The four types of bridge loans are:
Closed Bridging
For a predetermined time frame which gives more security for repayment.
Interest rates are also lower.
Open Bridging
The repayment method is not fixed, and there is no predetermined pay off date.
For security, the loan interest is usually deducted from the loan advance.
The interest rates are generally higher.
First Charge Bridging
The lender gets the first charge over the property and, in case of default, the lender will receive repayment first.
These interest rates are also lower.
Second Charge Bridging
The lender becomes the second charge, under the first lender.
The repayments will be made only after the first charge lender is paid.
The interest rates are higher.
However, the second charge has the same repossession rights to the property as the first one.
Bridge loans are usually quick to obtain and are flexible with repayment terms.
However, in case the loan cannot be repaid in time, the lender can recoup your property.
Commercial Real Estate (CRE) Loans
These are mortgages obtained by a lien on a commercial property which is income-producing.
They are more expensive since they are for the specific purpose of building or buying property to use for commercial purposes.
The terms can range from short-term to more extended, but the time for repayment can extend to beyond the loan period.
Deposit and interest rates can be higher.
The common types of CRE loans are:
Permanent Loans
Are first mortgages on commercial property.
They are for a longer period and must have some amortisation and a loan period of at least five years written in the contract.
SBA (Small Business Administration) Loans
There are various SBA loans for different borrowers.
They are both secured and unsecured.
Unsecured loans are usually for smaller amounts and cost more with shorter repayment terms.
Secured loans are for larger amounts against the security of an asset like another property.
Mezzanine Finance
Is a balance between debt and equity financing, where the lender has the right to convert to an equity interest in case of default.
It does not require property as collateral.
It is a way for raising funds for specific projects and can provide higher returns.
The advantage of mezzanine financing is that the interest is deductible for tax.
It can have fixed or variable interest payment structures.
It is subject to senior debt, but there is no amortisation of the principal loan.
Long term saving on interest costs can be accrued by restructuring mezzanine financing into senior debt at a lower interest rate.
However, it is often an unsecured debt and more expensive.
Because of the risk, some lenders may ask for warrants to participate in the success of the borrower.
Conclusion
Before deciding on the type of funding to be used, a budget will need to be drawn up, including costs of construction.
Additional costs will need to be taken into account, specifically the facility (arrangement) fee, interest rate and exit fee on completion.
Various other charges will also add up – fees for valuation, legal, administration and monitoring.
Drawdown fees (when every instalment is paid to the borrower) may also apply.
Depending on the loan, documentation will have to be provided, usually to cover the creditworthiness of the borrower, an evaluation of the property and plans for the building.
So, ahead of the final process, seek the expertise of a professional and experienced financial consultancy to find the right “easy methods” for you!