How to finance a real estate development

Real estate developments can be a great way to create additional wealth. They offer long-term revenue and can be a more stable way of investing money, when compared to stocks and shares. However, not many people have the necessary capital to be able to complete a real estate development – so how do you finance a real estate development?

Investment partners 

If you know some other people who share your desire to invest in a real estate development, then an investment partner can be a good choice. It means that there are no charges to be repaid in regard to interest and loan fees. However, any potential profits will have to be shared out between investors. What does this mean in the long term?

Well, it depends on what your intentions are. If you intend to sell the development on in the near future for a profit or rent out the development for a consistent revenue stream over a long period of time, then you need to be in agreement with your partner from the outset. If you are both in agreement, then an investment partner can help to cut down the costs associated with loans and mortgages.

However, an investment partner also gives you a smaller amount of control over how the development is carried out. If your partner changes their mind partway through or even after a number of years, it makes things more difficult for you to do what you want with the development. It also means that choosing a construction company could become a point of contention.

Mortgage 

Getting a mortgage for a real estate development is one of the most popular methods of raising finance. It ensures that as long as you keep up to date with payments, you will retain full control over the development. You will also be able to keep all money raised from the project in full. This can be either via rent or from a sale. The type of development you are carrying out will affect the type of mortgage you can get.

A residential development will need a residential mortgage. Any type of business development will need a commercial mortgage. While there is not much different between the two, a commercial mortgage may require more to get it passed than a residential mortgage. Proof that businesses have expressed an interest in moving into the development may be required, and in some cases, it may be required in writing that they will be moving in once the development is completed. A residential mortgage will usually be easier to complete, though it will still require proof of income to show that the mortgage can be paid off.

A mortgage does offer more control than using an investment partner. However, it does mean that there will be interest charges as well as regular monthly payments to be made. If you plan to sell the development to turn a profit, then there will usually be an early repayment charge on a long-term mortgage, unless you have negotiated with the bank to remove this. Monthly payments and interest charges can eat into any potential profits, so it is important to include them in any calculations you make in regard to your final profits.

Peer-to-peer secured lending 

Peer-to-peer secured lending is one of the newest forms of investment that has been gaining in popularity recently. Offering the ability for many people to provide a wide range of lending across a number of different investment opportunities all at once, companies such as Lendy have revolutionised the way that real estate developers go about getting finance. While it has similar drawbacks to taking out a mortgage, such as monthly repayments and interest charges, it also has additional benefits on top of the benefits that a mortgage offers.

The first is that early repayments are more likely to be negotiable. As it is not a financial institution in the same way that a bank is, it is more likely that you will be able to negotiate a smaller early repayment charge or even remove it completely. There is also the possibility that a more palatable interest rate can be negotiated.

Overall, it is important to choose the correct method of investment for your own needs. Each method offers different positives and negatives. Make sure that you carry out the requisite due diligence before you settle on a financing method. Once you have done that, you can begin to move forward with your development.