Are you wondering how to go about getting a business loan for property development?
Why wouldn’t I just get a regular home loan, you ask?
That’s why it might make more sense to get a business loan. Particularly if you’re engaging in the venture through a business, for instance, you might want to apply for the finance via your current entity.
Or perhaps a family trust that manages your existing entities.
Whatever the reason, in this article, we will explain how to go about getting a business loan for property development.
1. Property Development Loans Explained
As we mentioned above, a property development loan differs from a regular mortgage.
A standard home loan sees the bank loan you a sum of money to purchase a house.
The same applies to buying an investment property, although often, the loan structure is different.
But a property development loan is a different matter. It is finance designed to go towards the construction of multiple units or townhouses on one title.
If the number of units is four or less, a residential property development loan is likely.
But if you’re thinking about a larger project, say a block of apartments or a multi-unit development of more than four units?
Then a commercial loan is required.
A commercial loan is vastly different from a residential one. There is additional paperwork, and more of it, and other requirements from lenders.
2. More Differences Between Residential and Commercial Loans
One of the key differences is the interest rate. A residential development loan has a higher rate than a home loan. A commercial loan has a higher rate still.
You need to factor this into your calculations. Can you afford the interest repayments?
We often say in our articles that you can’t estimate in this business. You need to know your numbers. Go over them until you are rock steady.
We’ve seen people guess and estimate and wind up in strife. In addition to this, consider the fee structure. You’ll pay higher fees with a business loan for property development.
Again, do your research. Learn about the fee structure. Figure out if it’s viable. Don’t rush things.
Lenders are also much more conservative with commercial lending. This means that you will need to give them lots of information about the project.
You will need feasibility studies, plans, proof of financials and more. This is on top of all the standard lending criteria.
3. Factors to Think About
You’ll want to keep these in mind when getting ready to get a business loan for property development.
Know your borrowing limit. You can do this by approaching a lender or even a specialist broker. Once you know what you can borrow, you can factor this into your thinking.
Remember, you need to have airtight figures. Next is to consider your endgame. Do you want to sell all the units off the plan?
Are you planning on retaining some as investment properties? Will you live in one and sell the others?
This should help you develop a strategy. Finally, be prepared for the complexity of the application.
We mentioned this above. The bank or lender will gauge your own financial standing. In addition to this, they will want to know the project is viable.
4. What You Need to Provide to a Lender
We’ve put together a list of what a bank may ask you to provide.
You’ll need to provide all of this to prove your commercial development project is viable. This is essential to getting a business loan for property development.
This will include (but may not be limited to):
- Your working capital/existing funds
- Development experience, if any
- A design concept and plans for the project
- A timeframe for the build
- The total projected cost
- Your builder’s expertise, experience and prior form
- Zoning information
- Proof of contingency funds
- Plans for the completed properties
- Applications for development/permits
- Sales costs
These documents are vital to securing the commercial loan for property development, in addition to other factors.
You want to make them look as polished as possible.
If you are confident in putting them together yourself, ensure they are formatted correctly and look good.
You may also want to enlist a professional team to help you put these together.
For instance, you may have the skills and experience to put the documents together. But you might struggle with making them look nice.
In this case, a graphic designer is worth their weight in gold.
If you aren’t confident in developing these documents, consider asking for help.
5. Consider Alternative Sources of Funding
The big banks aren’t the only lenders for a business loan for property development.
In addition to banks, there are a range of other lenders and finance options out there.
For instance, there are second-tier lenders. These are still banks, but just smaller. A juicy commercial loan and the interest from it may entice them.
There are also private funders and joint venture are always an option under the right circumstances.
A private lender may have different terms and conditions to a bank.
A joint venture funder may ask for a stake in the profits, so you want to do your due diligence if you consider this.
Finally, a commercial finance broker may be an option. They will have a panel of lenders.
It’s also their job to make your application look good – because they work for a commission on the loan.
For a larger venture, you may also split your finance across multiple lenders. A broker would be a godsend in this case.
6. Be Prepared to Make Pre-Sales
This is another tip for larger projects that require a business loan for property development.
Some lenders will require a certain number of pre-sales to minimise their risk.
They may ask for proof of 50-60% of pre-sales before they deliver the money.
Remember that you can’t use any funds from the pre-sales to fund any aspect of your project.
They are typically held in escrow or trust.
7. The Bank Will Ask for Security for Your Loan
Even for commercial loans for property development, lenders will ask for security.
They will want you to put an asset on the table. If the loan falls through, the bank will claim the asset.
In some cases, this may be existing property. If you own land or a home, this may be your security.
However, it could be the equity in your property, depending on how much is there.
In addition, the bank might want the properties you are developing listed as security, so if you can’t service the loan, they can sell the properties to recoup their money.
So, when preparing to secure business property development finance, you’ll need some security.
Here are some examples of types of security:
- A mortgage over the property development
- General Security Agreement (GSA) over all of your rights and undertaking in relation to all security property, including pre-sale deposits.
- Rights to designs and intellectual property
- Directors/shareholders guarantee.
8. The Risk of Oversupply
Oversupply means when there are too many types of properties in an area. This could be residential, commercial or industrial.
This is the reason you see empty homes, empty shops and empty warehouses. The developer hasn’t considered oversupply.
Location is key here.
It can take years for your project to finish. You need to think years ahead. Consider fluctuations in the market too.
Will a large residential project, like eight units, contribute to the overdevelopment of an area?
In addition, are there big apartment blocks going up in the area? Maybe it’s not the best idea to build one next door.
Check with the local councils about approval plans for the area. See what’s going up and where.
You may also want to choose a growth corridor where people are flocking to affordable housing.
This may offer benefits over a crowded, inner-city suburb.
9. Want to Partner on a Development Project?
We’ve finished this article on getting a business loan for property development.
However, perhaps you’re intrigued by the possibility of becoming a developer but not sure where to begin.
But this doesn’t mean we can’t manage a larger project.
Every day, we run projects for clients and investors just like you.
You could become an armchair developer, where you sit back and reap the rewards while we do the heavy lifting.
Or we can skill you up and get you running your own projects.
Either way, give us a call on 1300 799 277 for a free, no-obligation consultation.