All developers have to start somewhere, but where do you turn if you cannot qualify for a conventional development finance loan? Specialist development finance is often restricted exclusively to experienced developers, so what are the options available for those looking to start a property development business from scratch?
Small Business Loans
One option is to approach a mainstream lender with a request for a small business loan. Depending on the viability of your business plan and your track record to date, you may be able to access some of the money you need to get your business off the ground. But as small business loans are usually strictly limited in terms of how much can be borrowed, the maximum loan value may be insufficient for property development purposes.
Developers looking to flip properties as quickly as possible for maximum profit often set their sights on property auctions. Homes that go under the hammer at auction often sell significantly less than their true market value. This is particularly true with homes that are in need of renovations and improvements, in order to bring them up to a habitable standard. Specialist auction finance can be a great short-term solution – a special type of bridging loan issued for these kinds of property purchases.
Speaking of which, bridging loans in general can provide the perfect alternative to specialist development finance. A development finance loan is at its core, a specific type of bridging loan with its own unique features and functions. A bridging loan can be secured against almost any type of property, making it the ideal choice for first-time investors who own their own homes. The funds needed to purchase and renovate your first investment property could be secured against your home, raised in a matter of days, and repaid a few months later when your investment property sells.
A commercial mortgage works in a similar way to a residential mortgage, providing the flexibility of being able to repay the balance over several years or decades. Commercial mortgages can be a useful facility for first-time property developers, though are somewhat restricted with regard to the types of properties they can be used to buy. In addition, commercial mortgages are not suitable for time-critical purchase and investment opportunities, as the underwriting process can often take several weeks (or months) to complete.
A conventional development finance loan need not be written off as an impossible because you are a first-time investor. Convincing lenders to back property development projects as a newcomer can be tricky, but is far from impossible. With the help and support of a skilled broker, it may be possible to present a case convincing enough to get a development finance specialist on board. Ultimately, they need to be presented with rock-solid evidence that they will get their money back in full and on time. In which case, the fact that this is your first property development project need not necessarily stand in your way.