Borrowing money for the development of a new property is relatively straightforward for an experienced property developer, while the alternate reality is that the crash rate for first-time developers is especially high.
To add to this, it is very difficult for a first time developer to secure the required funds to execute a project. In this guide, we will shed some light on some of the important basics of the development process, and we will also be providing some of our tips on overcoming difficulties that are typically faced by first time property developers.
Building a Reliable Track Record
By building a reputation of credibility, you incentivise a lender to finance your first development project.
Ideally, you should look to gain the required experience and expertise that will help you build a trustworthy track record way before you approach any lender. Any experience working for an experienced property developer will go a long way in helping you build a dependable CV.
If you are a dedicated, smart, and consistent hard worker, you could get started with your first venture by partnering with your current boss. This will give you all the credibility you need to borrow the funds you require.
If you have already set aside some funds to start your project, you could try to get a local residential developer on board to work as a partner on your project. Such an arrangement means that you now have a co-financier, not to mention the fact that you can also serve a unique type of apprenticeship by working as a junior partner. This will help you learn on the job much quicker.
If developing property is a retirement venture, it means that you can meet for your expenses through your retirement income. In such a situation it would be wise to approach a non-profit organisation that is dedicated to affordable housing. This will give you the required experience and know-how to fulfill your own project.
It is not impossible to secure funding without a good track record, but your options may be limited to angel investors and private loans.
How To Develop The Right Plan
There is no point in approaching potential lenders if your proposal is not attractive enough. Therefore, it is important to work on and develop your project to a point where it starts appealing to other investors.
In most scenarios, emerging developers focus on completing relatively small projects which involve one or two houses at a time. The process of acquiring funds is by no means straightforward and can in some instances be painstakingly time consuming.
This could mean that by the time you acquire the required funds, the property you had eyes on for the project may have already been sold. So, it is important to identify multiple available lands for sale. Consider these as backups and develop detailed plans for at least a couple of these properties.
Be absolutely thorough with your research about these properties. You should be aware of any/all zoning limitations attached to the property along with any other special conditions such as utility and access easements.
You can assure all potential lenders by providing them with as much information as possible about your development plan. Also, conduct research about rival properties as well as recently sold properties to establish that the prices mentioned for your properties are economical.
You could analyze the valuation of the property over the last three to five years and showcase this through a couple of simple graphs for each plot. Identify the type of housing that sells the most in such neighbourhoods, and create detailed plans for two or three of your main properties. Any plan you make should consist of preliminary sketches, which will help convince potential lenders that they are investing into a real project.
It is essential to build cost estimates for you development plan. Your estimates should include, labour, materials, profit and overhead. It should also cover charges related to any permits that you may have to take out for the property along with a 15% contingency fund. It is advisable to run your estimates for each development plan by your regional planning and building department.
The last step involves creating a great hook/pitch for your plan. You should be able to quickly describe your project to prospective lenders in a convincing manner. Try to avoid getting lost in the details; if they remain interested, you can delve into the specifics later. The initial pitch should just be a few minutes long. If you are able to confidently recite pound amounts and facts from memory, it will reassure potential lenders that you have put in the necessary time and effort to develop a profitable plan.
Securing the required funds from a traditional lender can prove to be especially tricky, when you are starting out. This may force you to look for angel investors and private lenders- wealthy people who are intrigued by the possibility of investing in your project but are unwilling to undertake something similar themselves.
Such investors are usually intrigued by the social implications of the project, such as affordable housing. You can also try to secure property finance which is a type of secured business loan offered by alternative finance lenders. Other possible options include family and friends, especially successful older individuals who are on the lookout for ways to diversify and increase their income.