When applying for property development finance it pays to do your homework. This means ensuring all your plans and projections have been well thought out and any potential barriers bridged.
Lenders base property finance loans on the feasibility of a project, making it critical to ensure that you are able to demonstrate your development or purchase has the capacity to generate income and profit.
If you are experienced in property development, then hopefully you can show a solid track record, but if you are new to the property development field then you may find it precludes you from the biggest property development projects and lenders will view you with caution.
There are always exceptions though and you can still make up for your shortfall in knowledge with some accurate and well-researched projections based on criteria your lender will understand.
How buy-to-let lending is decided
You will find that before you even get consideration from a buy-to-let lender you will need to demonstrate a certain minimum income. The actual income threshold will vary from lender to lender, some might be high, some lower, but to ensure you have access to the entire market, it is wise to demonstrate a solid existing income.
For anyone holding multiple properties (and therefore multiple mortgages) you may experience that the number of pre-existing commercial mortgages you have can preclude you from requesting any more. At this point, you may look to streamline your property finance by looking at portfolio finance.
Why lending always looks at property yield
The key to a successful property investment is its ability to generate income. The easiest way to calculate how much income a property can generate is the rental yield.
The yield is the rental return as a percentage of the property purchase price. So when you have purchased, invested and renovated the property, your total cost will dictate how much you borrow, but the final property yield calculation will dictate which lenders will lend and what rates they will offer.
Why gross development value is important
One of the foundations (pun intended) of your property development finance application will be your Gross Development Value (GDV). It lets your lender establish if your project is lend-worthy. Many lenders might not consider an application if the total build costs exceed 75% of the GDV or the end value of the project.
A worthwhile investment is one that allows the lender to loan 65% of the GDV, even if this equates to 100% of the total build cost.
Experience counts
Having experience in property development cannot be underestimated and lenders like to see some previous involvement in a project – however small – that has been successful and profitable. It is helpful if you have a good team of builders, planners and architects on your team.
In short, take a look at this checklist of what you will need for your property development finance application:
- Purchase price
- Total build cost
- Expected end value (GDV)
- Contingency plan
- Full costing breakdown
- Clear timescales (including expected or possible contingencies)
- Your ‘Property Development CV’
- Breakdown of your professional team (builders, planner, architect etc.)
- Planning permission (including restrictions)
- Building regulations
- Potential yield of the project
Lenders want solid investments with good rental yield when lending property finance so when applying for property development finance, it pays in both the short and the long term to have a good rebuild plan, give consideration to any setbacks you might incur and have a clear idea of the end value of your property.
If you are interested in property development and unsure what property development finance you can access, call us today on 03330 069 141 or request a call business finance consultation.
