3 Sources of Finance for Real Estate Development Projects
Have you ever wanted to know what the best sources of finance for real estate development projects are?
If you have, then read on because in this article I’m going to share with you three common sources of finance you could leverage to fund your next development project.
Hopefully by the end it will have you thinking outside the square because finance can come from anywhere. If your project is a solid one and the numbers stack up, finance should never be an issue.
The key is to identify the path that offers the best value and the least amount of resistance.
Alrighty, lets hook in.
Finance for Real Estate Development
Based on feedback we receive every day the number one thing holding first time, would be real estate developers back from undertaking their first project is the finance. The ability to fund their project.
Before I get too deep into the article I should mention that I’m not a financial advisor so I can’t provide financial advice.
These funding strategies are strategies I have used which I am simply sharing to help get you thinking of ways you can fund your own projects.
Now I have gotten the legalities out of the way.
Here are three common sources of finance to fund your first dual occupancy development project.
1. Mainstream Lending
Mainstream lending Generally speaking, if you have an existing home that you’ve owned for some time there is a chance you have some equity you can access that could potentially position you favourably to access mainstream lending.
By mainstream we are talking about taking out a loan from one of the major banks. You have the big banks such as the Commonwealth, ANZ, CBA and NAB. But depending on your financial position these tier one mainstream banks can be tricky.
The good news is there’s also a whole host of tier two mainstream lenders that offer packages suited to small to medium property developers. Such as Latrobe Financial, Homeloans and Pepper Finance to name just a few.
2. Private Lending
The second source of finance for your real estate development project is through private lending. Private lending is essentially taking out a loan with a high-net-worth individual/investor looking to make a return on their money.
Private loans can be negotiated either directly with the investor if you have access to one. Or you can leverage a broker that works with a network of private lenders. Private lending in the property development space is very common. High-net-worth investors love making money so if your project stacks up financially then you should absolutely reach out to a good broker that can connect you with a high-net-worth investor to fund your project.
Again, generally speaking because I’m not a financial advisor but in my experience the interest repayment rates for private lending are typically much higher than mainstream lending. Which makes sense. The additional percentage points are basically the cream for the investor.
Something you might be concerned about is your ability to repay the loan. This again is something your broker can help you with by finding you a private product that capitalises the interest. Meaning you won’t have to pay the interest until the end of the project when you settle the loan out.
3. Joint Venture
The third source of finance for your project is by doing a Joint venture. A joint venture is a legal agreement between two or more parties. So, you would team up with one or more parties to share the responsibilities, risks and returns.
The structure of a Joint Venture Agreement can be as creative as you like. An example might be…
… you own the land but you’re struggling to access the finance required to fund the development.
You team up with someone who has the funds. He or she can see the value in your project, so they agree to fund the project for a 50% stake in the financial outcome taking on 50% of the risk and 50% of the rewards.
In the case of a dual occupancy you might end up with one dwelling each to do with whatever you like. Or you could sell both and split the profits it’s whatever you agree too in the agreement.
… again, you’re better off making 50% of something than 100% of nothing. Your mindset should be whatever it takes to start building your wealth. Because the longer you leave it the harder it will become.
Side note, if you’re not sure check what a dual occupancy is .
So, to recap, the three sources of finance I’ve shared that you can finance your next real estate development project are;
- Mainstream lending (which is the banks).
- Private lending (which is the high-net-worth investors).
- Joint Venture Agreement (which is when you partner up and negotiate a deal with someone that sees the value in your project).
One thing to always be aware of when financing your real estate development are the setup fees, there isn’t much you can do about them, but you do need to be aware of them because they can be aggressive so could help you decide which product to choose.
Now everyone’s project requirements and financial positions are going to be different. The best thing to do before you rubber stamp your project and miss out on potential profits is reach out to a broker that works in the small to medium development space to see what options you have available.
Even if you have to pay a little more for your money because of your financial position don’t let it worry you. I can’t stress enough that it’s better to make 40, 50, 60% of something than 100% of nothing
Focus on getting your first real estate development project to the end. Improve your financial position in the process and then repeat and continue repeating.