Property development is a sound and lucrative strategy for wealth creation.
But it is imperative to understand the intricacies of funding and the challenges of financially managing any property development project.
Whether you’re a part-time, small scale property flipper or a full-time large-scale developer, the ability to secure the right type of financing and manage it effectively can significantly impact profitability.
Here’s what you should be considering about before launching your property development project.
Understanding different financing options
There are many different ways to obtain finance for your project.
Traditional bank loans
Conventional loans from banks have the lowest interest rates but they demand an excellent credit history, a sizeable downpayment and a longer term commitment. They work fine for those with an established track record but may be difficult to acquire for anyone starting out.
Hard money loans
These are short-term loans usually secured by the borrower’s own property asset. They are often used by flippers because of the short approval time and funding process. They come with shorter terms but higher interest rates, making them ideal for short-term projects.
Private money loans
Any loan sourced from a private investor rather than a financial institution. They offer greater flexibility but normally at a higher cost.
Construction loans
Short-term loans designed specifically to fund the construction of a property. They are typically interest-only during the construction phase with repayment of the principal beginning only after completion.
Bridge loans
Short-term loans that provide temporary finance until a more permanent solution is secured. They are popular with flippers who need to purchase a new property before selling an existing one.
Equity partnerships
Partnering with investors who provide capital in exchange for a share of the profits. This can be an effective way to fund projects without taking on debt.
Creditworthiness and financing terms
The finance and type of loan available to you will likely depend on your history, creditworthiness and project details.
Credit score
A strong credit score will help you secure better terms on loans such as lower interest rates and higher borrowing limits. It should also give you the option of utilising a traditional bank loan.
Loan-to-value ratio (LVR)
Lenders use this ratio to determine how much they are willing to lend. A lower LTV ratio means you’ll need more cash up front but may avail you better terms.
Debt-to-income ratio (DTI)
Lenders will assess your ability to manage additional debt based on your income relative to your existing debts. Keeping this ratio as low as possible improves your chances of securing financing.
Networking and professional relationships
Like in any industry, building professional relationships is likely to lead you to making better decisions, working with better people and saving you significant amounts of money at the same time.
Lenders and investors
Being on good terms with a multitude of potential lenders and investors, both individuals and company representatives, increases your chances of being able to access the best loan with the best terms.
Real estate agents
Partner with agents who have intimate knowledge of the local market and can offer you valuable insight into market cycles, prices and buyer behavior.
Contractors and suppliers
These people are your lifeblood. Work hard to source reliable and trustworthy contractors and suppliers who keep your project on time and within budget. Maintaining good relationships with them will likely result in better prices and priority service.
Budgeting and cost estimation
There is a never ending river of costs that accumulate in any property development project.
Acquisition costs
This includes the purchase price, closing costs and any immediate repairs needed to secure the property.
Renovation costs
Normally the biggest expense for flippers. It is vitally important to accurately estimate the costs of renovation before deciding to purchase. This includes materials, labor, permits and leave plenty of wiggle room for unexpected expenses that blow out your budget.
Holding costs
The cost of owning the property during the renovation. This includes mortgage payments, property taxes, insurance and utilities.
Selling costs
With your redevelopment complete, it’s time to sell. Factor in the marketing expenses, real estate commissions and closing costs into your bottom line.
Contingency fund
Leave a buffer of 10-20 per cent for unforeseen expenses. Anything less than that at the end is a bonus.
Managing cash flow
Cash flow management is critical to the overall success of your project.
Upfront capital
It starts with the funds you need to purchase the property. This includes the initial stages of renovation until financing is available.
Draw schedules
If you are using construction or hard money loans, funds are drip fed in what is known as ‘draws’ scheduled for particular milestones along the way. Familiarise yourself with the schedule to ensure you guard against delays by always having enough funds for when you need them.
Liquidity
Maintain enough liquidity to allow for delays or cost blowouts. Cash flow management is even more critical if you are managing multiple projects at once.
Risk management
Managing risk is a critical aspect of any property development.
Market research
Research the local real estate market thoroughly, analysing demand, infrastructure, competition, trends and property values. This knowledge is key to your ability to make an informed decision about what to buy and when.
Regulations and permits
Familiarize yourself with local zoning laws, building codes and permit requirements. Non-compliance can result in costly fines and delays.
Insurance
Your project will need adequate insurance at all times. This includes builder’s risk insurance, general liability and title insurance which protects the lender from a future claim against the ownership of the property.
Exit strategy
Every project needs a smooth exit strategy planned from the very beginning.
Selling the property
Consider how and when you plan to sell, considering market timing, your pricing strategy and your target buyers.
Refinancing
If you decide to hold the property as a rental, consider your refinancing options. A cash-out refinance can allow you to recoup your initial investment while retaining the property.
Back-up plan
Always have a plan B. It could be because market conditions change or the property doesn’t attract the offer you need. If you are unwilling to accept a lower price, you might need to rent the property for a short period of time or come up with another strategy.
Legal and tax considerations
Engage a real estate attorney to ensure all of your agreements with your partners are clearly defined and legally sound.
Understand the tax implications of flipping or developing properties including property taxes applicable at the time of purchase as well as state and federal capital gains taxes.
Get advice today
There is a lot of wealth to be created in property development.
But it does take some planning.
Carefully considering your best sources funding and meticulously plotting a financial management strategy that caters for all possibilities is the smartest and safest way forward.
That’s where Equidy can help.
Equidy has a deep and personal history in property covering all aspects of real estate and development in California after being founded more than 40 years ago.
We stand by our mantra that anything is possible and we are determined to make it happen.
Our goal is to help you realize your dreams, by rewarding entrepreneurship and facilitating your wealth creation.
But Equidy isn’t just about helping you secure finance.
We will act as your financial mentor, working creatively with you every step of the way.
And we’ll finance your property development faster, without tying you up in all the red tape associated with traditional lenders.
We enjoy long and established relationships with investors, entrepreneurs and real estate professionals while leveraging our reputation and trust and using clear communication to minimize the risk to all parties.
Contact Equidy today to book your free strategy call.
