Few Things To Keep In Mind While Financing Luxury Property Development

A lot of luxury property investors are moving into advanced strategies, for example, property development as an approach to develop their wealth.

Obviously, property development carries with it more potential benefits as compared to traditional property investment, but it accompanies a few risks as well. There are various elements that you should consider before deciding whether property development is the correct strategy for you, including the different finance options accessible for your project.

In case you are a luxury property developer, landlord or investor, there are a lot of finance options available to enable you to start your next project. But, even for the experienced individuals, the alternative lending market can seem vast and complex — in this article we’ll explain some of the important things to consider, so you can make the correct property development finance choices.

Commercial Loans

Commercial loans can be utilized to buy business properties like shops, warehouses and offices — practically anything that isn’t a private property. In other words, they work in the same way as private home loans, helping you spread the cost of a huge purchase over the time (a number of years).

Mostly, the commercial mortgages are taken by existing organizations that need to purchase their own premises, where their business as of now works. An example may include a dental practitioner who is willing to purchase the building where she practices. Instead of paying a lot of rent, she would like to own the property, but can’t manage to pay for it.

In case you prefer not to contribute money yourself, it is sometimes possible to secure 100% of the fund utilizing additional security — but you must have favorable conditions like a strong trading record or a history of working from same premises. While it’s simpler to secure a commercial mortgage as a current business, it’s also possible to get one for a startup as well. But, it will be more challenging because there will be more risk for the lender.

Things You Need to Include in the Application

As compared to residential loans, applying for property development finance is more time consuming and require a lot of details including:

  • Site description
  • Cost of the land
  • Cost of construction
  • Type of development
  • Other Costs
  • Timelines until completion
  • The equity available
  • Financial capabilities of the developer
  • The development experience

Commercial mortgages versus purchase to let mortgages

Another circumstance where a commercial mortgage may be suitable is when a landowner with an extensive property portfolio needs to purchase more properties — by joining different properties into one mortgage, it’s possible to cut arrangement expenses and exploit economies of scale, and in addition, having one point of contact with one lender.

Generally, it is a setup that should be reserved for a full time landlord with a lot of properties, and wouldn’t be good for an individual acquiring first investment property.

Auction finance

Auctions can be a fast approach to get a property at the discounted cost, and there are moneylenders who have expertise in auction finance. Once you have made the winning bid, the auction house will demand the fund within 28 days. This implies you need to move quickly to secure funding.

Finding a moneylender who has some expertise in auction finance implies you can get the cash significantly speedier than the standard, so it’s the best path to take in case you’re thinking about property auctions. Sometimes, it is also possible to get the cash inside a week.

Bridging finance or development finance

Another kind of funding is bridging or development finance. This can mean any short-term financing that helps pay for building and development costs. These two terms have noteworthy overlap and may appear to be interchangeable, but there are differences between the two. The main concern that decides whether you require development finance or bridging finance is how heavy your project will be.

How extensive are the building works going to be?

This is the most imperative thing to ask before you investigate your finance alternatives for repair or renovation. To figure out what kind of finance you require, it’s helpful to consider projects in three broad classes:

Light renovation

This is the simplest type of task, where in general the fundamental changes are aesthetic instead of structural but may include some inner work on floors, roofs and walls.

Heavy Repairs

Including aesthetic changes, this could require moving inner walls, pipes, or electrics, adding internal walls or rooms, or even partial rebuilding.

Ground-up development

This is where a lot of renovation or development is needed or you can say beginning with a vacant plot of land. The terminology in the property development isn’t thoroughly defined, so what a few people consider a light refurb could be viewed as heavy by others.

Final Words

Property development is a complex zone, particularly with regards to finance. At last, the best initial step to take while figuring out what sort of fund you require is to survey how extensive the task is, how much time it will take, and the amount it is probably going to cost (in both the best and the worst case scenario).

All property developers are great organizers, and getting the correct finance set up is crucial for development success — whether you’re purchasing your organization’s premises, or developing your rental portfolio.


Written by: Alex Smith is an editor and works at Challis Capital Partners. He enjoys creating, uncovering and disseminating new and interesting perspectives on Finance, Investments and Mortgages. Challis Capital Partners provides Commercial Loans and Property Finance services throughout Australia.

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