How to finance your first property development

Property development a great business to start whether you are a first-time entrepreneur or a seasoned veteran. Despite the uncertainty around Brexit, the UK property market is still growing, and there are plenty of opportunities for new developers to carve out a slice of the action.

As well as being in a potentially very lucrative market, a property development business is relatively easy to start. There are no barriers to entry when it comes to education—you don’t need a degree and you can hire property experts such as surveyors and builders easily. A property development business also offers flexible working opportunities and it is entirely possible to grow a development business alongside another enterprise or with a full-time job.

But despite what day-time TV may have you believe, property development is not a get-rich-quick business. Becoming a successful property developer requires hard work, exceptional planning and an absence of ego.

It also requires a fair bit of startup capital. Few entrepreneurs will be able to buy their first property outright—even at auction—which means that the first hurdle to overcome is securing funding for your first development.

Luckily, you have several options when it comes to property finance.

Buy to let mortgages

If you are looking to purchase and refurbish a single property with a view to renting it out for several years, buy-to-let mortgages can be the perfect funding solution. Buy-to-let mortgages are similar to residential mortgages in that you will need a certain level of income to qualify and this income will determine the amount of capital you are able to borrow. Like residential mortgages, they are also limited to one single property. That means you will need to look for additional funding if you want to expand your portfolio in the future or if you want to start your development journey with several properties at the same time. While buy-to-let mortgages aren’t suitable for properties that need significant development, they are a great way to get your foot on the ladder.

Commercial mortgages

Are you or your business looking to expand into commercial property development? Then a commercial mortgage could be an excellent solution. This is particularly true if you want to start by buying and developing your current business premises. That being said, this type of funding is strictly limited to commercial properties like offices, shops and warehouses, and it works in a similar fashion to residential mortgages. That means that if you want to develop residential properties or require additional funding to redevelop a commercial property, this may not be the best option.

Auction finance

Property auctions are one of the most popular ways for budding developers to find their first (or second or third) property to develop. Properties listed at auction are often much more affordable than properties listed on the traditional market, but they often require a lot of work to be carried out. Still, if you want to be a property developer that is exactly the kind of work that the job entails.

Buying at an auction can help you grab a great bargain, but the auction house will demand the money within a month. This can create a dilemma for some developers who don’t have ready access to finance but don’t want to miss out on their perfect property. To solve this issue, many lenders offer auction finance, a short-term bridging loan that can be arranged extremely quickly and used to cover the cost of the property until funds can be released at a later date. Auction finance can even be agreed in principle prior to the auction so that developers can go in with a clear idea of what they can afford.

Bridging loans and development finance

Bridging Loans and Development Finance are the most common choice of finance for seasoned property developers. These short-term funding options can help with both the purchase of the property and its development. They can also be arranged and released very quickly giving developers flexible access to finance when they need it.

There are many advantages to bridging loans and development finance, which is why developers prefer them over more traditional forms of funding. For one, they allow for substantial amounts of funding to be arranged and released very quickly—and often all in one go. That means that developers don’t have to complete work to a certain level before accessing additional funding. Developers can also borrow up to 100% of the finance without a deposit by securing the loan against the property in question or additional property. Finally, the loans are incredibly flexible and can be tailored to your unique situation as a developer. So whether you just need a three-month loan to refurbish a property, a 24-month loan to build from the ground up, or want to convert your loan into a buy-to-let mortgage at the end of its term, bridging loans and development finance providers can offer the perfect solution.

Ultimately, the success of your development can hinge as much on getting the right type of property finance as finding the right property to invest in. As a result, it is well worth taking the time to speak to several funding experts to make sure that you secure the best deal possible and get your first property development off to a great start.