There are people who want to get into property development but are reluctant to quit their full-time jobs. In many cases, this is because of the large amount of money required to get started. They think that they will have to put up the capital on their own. However, this is not the case.

There are several ways to get the money required to fund your property development business. The most well known are real estate development loans of which there are different types like acquisition loans and construction loans. Such loans can be sought from various funding sources like banks and private lenders.

Before you apply for a real estate development loan, it is important to do your research and find out about the various pros and cons of borrowing from each of these sources. This way you can consider all the different options available to you when you’re getting your next project off the ground. Let’s take a look at some of the most common funding sources.

Traditional Loans From Banks

The main reason why many developers opt for traditional loans from banks is the low interest rates. In the current economic scenario, all the major banks are more than willing to back property developers.

The area where your business operates also has a part to play in how easily you can get a bank loan. Lenders are more favourable to developers in regions where there is short supply and more demand for property. If the developer has a good amount of presales secured and all the paperwork is in place, banks will offer the capital required.

Banks are sometimes reluctant to give out large loans when the country’s economy has taken a hit. This is mainly because developers require large deposits. There are also likely to be fewer buyers in the market when the country is going through a recession. Also, developers find it increasingly difficult to sell projects based on plans, as buyers want to see the finished product before taking the plunge.

Private Equity Funding

Developers typically favour private equity funding over bank loans for a number of reasons. Private companies are more flexible and the amount of paperwork required for a loan is much less.

While private lenders charge a higher rate of interest than banks, the conditions to be met to secure the loan are fewer. Since it is easier to obtain funds, many developers prefer this option since it ensures that the project can keep progressing.

Tips To Keep In Mind When Raising Development Funding

Borrowing money to fund your business comes with its own set of challenges, especially if you’re new to the world of property development. Here are a few ways of overcoming these and getting the financial aid you need.

Acquire Experience And Credibility

A lender is more likely to fund your project if they believe in your credibility. They will definitely study your past projects and examine your track record before agreeing to work with you. This can be challenging if you are a first time property developer. On-the-job experience with a reputed real estate company will work in your favour.

Team Up With A Partner

Teaming up with a partner like a small-scale residential developer can add to your credibility. This is a great move, especially if you don’t have firsthand real estate experience. So if you already have some capital to begin with, they can co-finance the project with you. When entering into a partnership with someone, be sure that your respective roles and investments are discussed and put down in writing.

Put Together A Comprehensive Business Proposal

Your business proposal is basically a road map of how you plan to achieve your goals. In order to secure a loan, you will need to present a detailed business proposal to various stakeholders. A well-written plan will give potential investors the confidence that you know the way the business works and have considered all the key issues that may come up.

Get The Necessary Permissions

Having the requisite permissions in place before seeking a loan can work to your advantage. Contact your local council to find out if your project will require planning permission. This can be a lengthy process, so do this well in advance. This will save you money and speed up the loan application process.

Understand Your Local Property Market

Before meeting with lenders, study and understand the ins and outs of the area you operate in. This will not only allow you to secure finance but also help you avoid issues down the line. It is a big mistake to go into a meeting without thorough knowledge of your project. Investors are likely to ask a lot of questions, which you will only be able to answer if you’ve done your research.

Be Honest And Realistic

It’s important to be honest about your experience and realistic about your goals. Be clear and transparent about the nature of your business and explain the strategies you plan to implement to achieve your objectives. This will ultimately help your case when you take your application to potential lenders. Property development can be a risky business, and investors will only back someone they trust.

Final Thoughts

Property development can be an interesting and lucrative line of work. However, when it comes to financing a project, the many options available can be difficult to navigate. There is a definite learning curve, and you will need to be aware of the pitfalls to avoid when borrowing money. It’s a good idea to get in touch with a financial consultant who will be able to guide you through the process and give you sound advice.

When you’re looking to secure capital for your projects, make sure to weigh out the pros and cons of the various types of funding sources. Compare the different options and ensure that you’re making the right call. As with many other aspects of property development, funding your projects becomes easier with time and experience.

Leonard Ross is an established property developer in Auckland, New Zealand.