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Obtaining Finance For Your Development Deals

This month, Ritchie Clapson, co-founder of PropertyCEO, looks at how to obtain the finance you will need to pay for your property development deals.

Small-scale property development has become one of the most popular property strategies for existing landlords looking to create greater profits and for new investors who may previously have only considered a buy-to-let model. The impressive returns and significant scope presented by the government’s recent changes to Permitted Development Rights have generated unprecedented interest and a wealth of opportunity. But how can those new to development enter the fray and make money without making serious mistakes?

I recall way back in the mid-90s, one of Tom Cruise's better (and possibly more underrated) films, Jerry Maguire, gave us the memorable tagline: "Show me the money!". A quarter-century on, finding the money is still one of the top questions and concerns of those considering taking on a development project for the first time. After all, your development won't get out of the blocks without funding. And if you've no track record as a developer, who in their right mind would lend you hundreds of thousands of pounds, if not millions, to do your first property deal? Surely it would require a massive leap of faith on the lender's part, or perhaps just pure recklessness? You won't be surprised to learn that neither are hallmarks of your average commercial lender, and yet the reality is that all the money you could want is out there. You just need to know how to go about approaching things the right way. Let me shed some light.

Finance for developments can come from several potential sources but let me start with what is ‘route one’ for many developers, namely commercial funding. There are a significant number of banks and lending organisations out there that specialise in lending to developers. Most, but not all, prefer to do business via commercial brokers, and this is generally good news for you because it means the broker will do the shopping around for you. You should approach several brokers to ensure you've got access to a good range of lenders, and each broker will find the most suitable options based on the project and your own situation.

There are two parts to the lending. The first loan is used to purchase the asset, i.e., the plot of land or building to be developed, and the second funds the development work itself. Your lender will advance you up to 70% of the asset finance, leaving you to find the remainder from either your own cash or from private investors (more on this later). The bank will then take a first charge on the asset. The good news is that they will then lend you 100% of the development finance, which they will release to you in tranches during the project's development phase. At each stage, they'll send a surveyor round to make sure that the previous advance has been spent appropriately and that the development has moved forward before they release the next tranche.

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