Property development finance
Discussion
Turning to the wisdom of PH to hopefully provide some tips and or contacts to engage.
Bit of history, I have a couple of BTL's, I've renovated a few houses to flip or to live in and have done OK. So I'm fairly comfortable in the world of property generally but obviously low level type stuff.
I've now identified a property at auction which looks to have great potential as it's a bungalow on a large plot. So there's an opportunity to either knock down and build 2-3 detached properties or in a dream world I'd love to build a block of (appropriately sized) flats. I have a trusted builder who can do these kind of developments, what I don't have as I haven't had to use before is a way to finance this. I'd be looking at probably needing £500k. How do people go about funding these kind of deals for the initial purchase via auction + on-going build costs? I'm aware of bridging loans and the like but wouldn't want to just jump into the first one I find on a random google search hence me asking here.
Bit of history, I have a couple of BTL's, I've renovated a few houses to flip or to live in and have done OK. So I'm fairly comfortable in the world of property generally but obviously low level type stuff.
I've now identified a property at auction which looks to have great potential as it's a bungalow on a large plot. So there's an opportunity to either knock down and build 2-3 detached properties or in a dream world I'd love to build a block of (appropriately sized) flats. I have a trusted builder who can do these kind of developments, what I don't have as I haven't had to use before is a way to finance this. I'd be looking at probably needing £500k. How do people go about funding these kind of deals for the initial purchase via auction + on-going build costs? I'm aware of bridging loans and the like but wouldn't want to just jump into the first one I find on a random google search hence me asking here.
Coldplaya said:
what I don't have as I haven't had to use before is a way to finance this. I'd be looking at probably needing £500k. How do people go about funding these kind of deals for the initial purchase via auction + on-going build costs? I'm aware of bridging loans and the like but wouldn't want to just jump into the first one I find on a random google search hence me asking here.
If you don’t have the cash you need (and can’t raise it from your other assets/don’t have a consortium doing it together), loan/mortgage or funding from one or more investors are really your only options.The issue you have is that a £500k liquidity requirement, if there’s good money to be made, probably puts you in competition with people who have done this sort of thing before and/or can simply write a cheque. They can go into the room without the upfront investment you’d need to make in securing finance.
If you borrow money, pay close attention to the repayment schedules. Not sure if it’s still the case but when I last looked at self-build mortgages there was still interest due (rather than accrued) during the build phase. At current interest rates that could amount to significant cash outflows.
I do this sort of thing. Development finance is your answer.
Horrendously expensive and you will need to give a personal guarantee so everything you own is on the line.
It is not easy money.
It is full of risk.
Be very careful.
I speak as someone who is/was a builder so I really do understand property.
Horrendously expensive and you will need to give a personal guarantee so everything you own is on the line.
It is not easy money.
It is full of risk.
Be very careful.
I speak as someone who is/was a builder so I really do understand property.
A good friend is in property, buys houses, gets planning, splits plots and sells (very occasionally will refurb existing house)
As suggested above finance costs have jumped up lately, typical deal might be (no personal guarantees on his part)
Loan up to 80% sale price (he has to fund fees, planning costs and 20% deposit himself) Once planning arrives he can get another valuation and take additional borrowings up to 80% of that.
Finance costs can be up to 2% day 1 (inc brokerage and admin fees)
1.25% a month (1.5% if he wants roll it up to the end)
1% exit fee
On a year deal it can be 20% APR
These people seem to fund a lot of small developments around Cheshire
https://togethermoney.com/
As suggested above finance costs have jumped up lately, typical deal might be (no personal guarantees on his part)
Loan up to 80% sale price (he has to fund fees, planning costs and 20% deposit himself) Once planning arrives he can get another valuation and take additional borrowings up to 80% of that.
Finance costs can be up to 2% day 1 (inc brokerage and admin fees)
1.25% a month (1.5% if he wants roll it up to the end)
1% exit fee
On a year deal it can be 20% APR
These people seem to fund a lot of small developments around Cheshire
https://togethermoney.com/
I think costs are getting on to 20% now for this type of finance and lenders are paying more attention to how easily and quickly they can strip clients of what they owe them if the project goes south as many do because of failure to factor in time delay risk and costings failures.
You've got to make sure you have your numbers absolutely tied down and correct as there are two key points at play:
1- You will be overpaying for the asset to beat cash buyers and you will have vastly higher ongoing costs compared to cash buyers so you need a much fatter margin than they do or willing to accept a much lower margin which means a hugely increased risk.
2- You are betting everything you own and potentially a chunk of your future income. If it goes wrong a semi completed development project gets valued down very heavily and that difference between value and loan balance is of course to be paid by you so you have to pay it or more often, be forced to pay it by the courts.
With a BTL you're often just risking the deposit you have put in and maybe a bit more but you have insurance against tenant default and damages. With development the risk goes much, much further even if you do ring fence the project.
You've got to get all your numbers right and be devoutly confident in them plus that'll help you with your loan applications.
You've got to make sure you have your numbers absolutely tied down and correct as there are two key points at play:
1- You will be overpaying for the asset to beat cash buyers and you will have vastly higher ongoing costs compared to cash buyers so you need a much fatter margin than they do or willing to accept a much lower margin which means a hugely increased risk.
2- You are betting everything you own and potentially a chunk of your future income. If it goes wrong a semi completed development project gets valued down very heavily and that difference between value and loan balance is of course to be paid by you so you have to pay it or more often, be forced to pay it by the courts.
With a BTL you're often just risking the deposit you have put in and maybe a bit more but you have insurance against tenant default and damages. With development the risk goes much, much further even if you do ring fence the project.
You've got to get all your numbers right and be devoutly confident in them plus that'll help you with your loan applications.
I’m not sure what the current rates are but ime if you have the equity in your house or even your btl it will be cheaper to borrow against those.
Sarnie said:
I’m not one to disagree with you on mortgages but they were terrible. Puzzles said:
I’m not sure what the current rates are but ime if you have the equity in your house or even your btl it will be cheaper to borrow against those.
They are nothing to do with me but they seem to mop up in this sector, possibly become too big to handle all the business they receive?Sarnie said:
I’m not one to disagree with you on mortgages but they were terrible. Coldplaya said:
Turning to the wisdom of PH to hopefully provide some tips and or contacts to engage.
Bit of history, I have a couple of BTL's, I've renovated a few houses to flip or to live in and have done OK. So I'm fairly comfortable in the world of property generally but obviously low level type stuff.
I've now identified a property at auction which looks to have great potential as it's a bungalow on a large plot. So there's an opportunity to either knock down and build 2-3 detached properties or in a dream world I'd love to build a block of (appropriately sized) flats. I have a trusted builder who can do these kind of developments, what I don't have as I haven't had to use before is a way to finance this. I'd be looking at probably needing £500k. How do people go about funding these kind of deals for the initial purchase via auction + on-going build costs? I'm aware of bridging loans and the like but wouldn't want to just jump into the first one I find on a random google search hence me asking here.
Sans cash…Bit of history, I have a couple of BTL's, I've renovated a few houses to flip or to live in and have done OK. So I'm fairly comfortable in the world of property generally but obviously low level type stuff.
I've now identified a property at auction which looks to have great potential as it's a bungalow on a large plot. So there's an opportunity to either knock down and build 2-3 detached properties or in a dream world I'd love to build a block of (appropriately sized) flats. I have a trusted builder who can do these kind of developments, what I don't have as I haven't had to use before is a way to finance this. I'd be looking at probably needing £500k. How do people go about funding these kind of deals for the initial purchase via auction + on-going build costs? I'm aware of bridging loans and the like but wouldn't want to just jump into the first one I find on a random google search hence me asking here.
You’ll need a bridge on the purchase to enable planning. Either secured on existing security, new purchase security or a mixture of the above.
Planning..
Exit bridge to Sale/Dev Financing.
I’m south east based, large plot bungalows, will normally be enlarged sides and back then roof off and conversion of roof space, Sometimes in less complex this can be dealt with via PD..
Time is money with a bridge and rolled up/retained interest. Time catches up with inexperienced developers hence a lot of partially finished refurbish/developments.
With retention of land for an other bungalow if suitable sized plot.
Flats PIta unless you have extensive experience imo..
Nb..Have just funded a knocked down a block of four flats to build a large family home… location location eh!
All good advice so far thankyou.
I’m fairly comfortable with risk overall, you have to risk/spend money to make more money ultimately.
I feel i’ve done the amateur side now with BTL’s and simple house reno’s and really would like to make that step up to bigger devs.
A big de-risking factor is the builder also wants skin in the game so will fund some of the build costs in return for a share of profits. That complicates things to a degree re the profits from sale etc but also means he has a vested interest in focusing on this project Vs any others (you’d hope). He’s also done many ground up builds like this.
Looks like bridging loan is the way to go, i remember briefly googling last time a few years ago and rates were scary so likely to be even more so now…
I suppose given the build is in phases it’s drawing down on those loans as and when needed rather than taking out the full cost up front which is less scary/onerous at least.
Again, thanks for tips and advice so far.
I’m fairly comfortable with risk overall, you have to risk/spend money to make more money ultimately.
I feel i’ve done the amateur side now with BTL’s and simple house reno’s and really would like to make that step up to bigger devs.
A big de-risking factor is the builder also wants skin in the game so will fund some of the build costs in return for a share of profits. That complicates things to a degree re the profits from sale etc but also means he has a vested interest in focusing on this project Vs any others (you’d hope). He’s also done many ground up builds like this.
Looks like bridging loan is the way to go, i remember briefly googling last time a few years ago and rates were scary so likely to be even more so now…
I suppose given the build is in phases it’s drawing down on those loans as and when needed rather than taking out the full cost up front which is less scary/onerous at least.
Again, thanks for tips and advice so far.
We did one recently for a client with Roma finance. Pretty good rates think 11-12 pc a year interest. They are also funding the build costs.
Got another we are doing for 5.3m and again that is about 10-11 pc.
I’d only recommend these if you aren’t pushing things to the max as you need to factor in extra time for the exit.
On the 2nd deal our client owns the site outright and the end gdv is 14m so an easy term out as they want to rent them.
On the first the commercial and resi part is already bringing in 60k pa so if planning is delayed on the bit being converted, interest can be serviced easily.
Just look at your exit before you enter is what I always say. That way the rate is what it is and you just plug it into the spreadsheet to see how it affects your end margin.
Got another we are doing for 5.3m and again that is about 10-11 pc.
I’d only recommend these if you aren’t pushing things to the max as you need to factor in extra time for the exit.
On the 2nd deal our client owns the site outright and the end gdv is 14m so an easy term out as they want to rent them.
On the first the commercial and resi part is already bringing in 60k pa so if planning is delayed on the bit being converted, interest can be serviced easily.
Just look at your exit before you enter is what I always say. That way the rate is what it is and you just plug it into the spreadsheet to see how it affects your end margin.
Coldplaya said:
A big de-risking factor is the builder also wants skin in the game so will fund some of the build costs in return for a share of profits. That complicates things to a degree re the profits from sale etc but also means he has a vested interest in focusing on this project Vs any others (you’d hope). He’s also done many ground up builds like this.
If you’ve not already done so, be really clear with him and agree what the deal is up front (I.e. is he not going to charge for some of his time or genuinely buying significant materials/paying his lads out of his pocket) and then watch like a hawk to check he’s not double dipping. You will find some that expect to be paid full commercial rates, and make a margin on supplies, and then take a share of the profit. It’s always my view that you get a share of profit only if you’re genuinely taking risk. If he’s not doing it below commercial rates and/or being on the hook for the finance/losses if it goes wrong then there’s only upside for him.
LooneyTunes said:
Coldplaya said:
A big de-risking factor is the builder also wants skin in the game so will fund some of the build costs in return for a share of profits. That complicates things to a degree re the profits from sale etc but also means he has a vested interest in focusing on this project Vs any others (you’d hope). He’s also done many ground up builds like this.
If you’ve not already done so, be really clear with him and agree what the deal is up front (I.e. is he not going to charge for some of his time or genuinely buying significant materials/paying his lads out of his pocket) and then watch like a hawk to check he’s not double dipping. You will find some that expect to be paid full commercial rates, and make a margin on supplies, and then take a share of the profit. It’s always my view that you get a share of profit only if you’re genuinely taking risk. If he’s not doing it below commercial rates and/or being on the hook for the finance/losses if it goes wrong then there’s only upside for him.
I can imagine the plot is going to be extremely in demand as noted above so we shall see. Hoping given current situation on rates etc may scare people off a tad but people with this kind of cash likely love these kind of times to hoover up distress sales and the like
It is hard to use conventional mortgages for anything bought at auction and you really need your wits about you with auctions, you need to know if there is anything that would stop you getting a mortgage.
I have had clients buy at auction and exchange immediately then ask me to put a mortgage on them, I have seen no working kitchen and bathroom (instant no from a lender), leasehold houses very close to railway lines (owned freehold by the railway) Instant no and property with severe structural issues….those were a no too and the clients lost their deposits. If you haven’t got the ability to use cash or bridge / other finance the it is very risky.
I have had clients buy at auction and exchange immediately then ask me to put a mortgage on them, I have seen no working kitchen and bathroom (instant no from a lender), leasehold houses very close to railway lines (owned freehold by the railway) Instant no and property with severe structural issues….those were a no too and the clients lost their deposits. If you haven’t got the ability to use cash or bridge / other finance the it is very risky.
Caddyshack said:
It is hard to use conventional mortgages for anything bought at auction and you really need your wits about you with auctions, you need to know if there is anything that would stop you getting a mortgage.
I have had clients buy at auction and exchange immediately then ask me to put a mortgage on them, I have seen no working kitchen and bathroom (instant no from a lender), leasehold houses very close to railway lines (owned freehold by the railway) Instant no and property with severe structural issues….those were a no too and the clients lost their deposits. If you haven’t got the ability to use cash or bridge / other finance the it is very risky.
Yup. I would imagine that one would want to be renting the property out while you are paying out over an unknown time period to get planning that may or may not be forth coming, especially with a bungalow as for some time haven't local authorities been reticent to allow development? I have had clients buy at auction and exchange immediately then ask me to put a mortgage on them, I have seen no working kitchen and bathroom (instant no from a lender), leasehold houses very close to railway lines (owned freehold by the railway) Instant no and property with severe structural issues….those were a no too and the clients lost their deposits. If you haven’t got the ability to use cash or bridge / other finance the it is very risky.
Either way, I had assumed the OP meant to put the property into a BTL mortgage to start with so that it could earn some form of yield at a vaguely competitive cost while the whole plan to develop was put in place? You'd be mental to buy it with development debt and be paying that huge premium with no yield while you spent months to years trying to get planning and everything sorted and all in a soft market where failed projects look to be heading towards pennies in the £.
DonkeyApple said:
Yup. I would imagine that one would want to be renting the property out while you are paying out over an unknown time period to get planning that may or may not be forth coming, especially with a bungalow as for some time haven't local authorities been reticent to allow development?
Either way, I had assumed the OP meant to put the property into a BTL mortgage to start with so that it could earn some form of yield at a vaguely competitive cost while the whole plan to develop was put in place? You'd be mental to buy it with development debt and be paying that huge premium with no yield while you spent months to years trying to get planning and everything sorted and all in a soft market where failed projects look to be heading towards pennies in the £.
If you wanted/needed some yield then short term/airBnB letting only.Either way, I had assumed the OP meant to put the property into a BTL mortgage to start with so that it could earn some form of yield at a vaguely competitive cost while the whole plan to develop was put in place? You'd be mental to buy it with development debt and be paying that huge premium with no yield while you spent months to years trying to get planning and everything sorted and all in a soft market where failed projects look to be heading towards pennies in the £.
Remember despite all the hurdles everyone has posted you need to get the units sold at the end of the day and looking forward in the next couple of years I can see that being more difficult than it has been. If you go with houses it will be easier but could still be difficult the whole industry is cooling right now.
I suspect your builder friend wants in because they see it as work in a market thats slowly drying up, having your own jobs to fall back on is a perfect way to ride out a storm.
Caution is key here IMHO.
I suspect your builder friend wants in because they see it as work in a market thats slowly drying up, having your own jobs to fall back on is a perfect way to ride out a storm.
Caution is key here IMHO.
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