Toevolution

Perhaps, you have planned to get into property development and seek funds for it. Why not consider a regular home loan? This is a question that is asked by many. Well, there is present a significant difference between finance required for residential property development and traditional home loan. Hence, a business loan does make more sense. 

About property development loan

When compared to a regular mortgage property development loan is stated to be different. For purchasing a home, you generally apply for a standard home loan where you get an amount. In the case of investment property, the loan structure is found to be different. Business loan for property development is designed to construct multiple townhouses or units with a single title. 

Difference between Commercial and Residential loans

The interest rate is considered to be a major difference here. A residential development loan comes with a higher interest rate when compared to a home loan. The higher rate is charged on commercial loans. This should be factored into your calculations. Will you be able to afford your interest repayments? Identify your numbers and make sure to be rock-steady. The business loan meant for property development invites a higher fee structure. 

Factors to consider

Identify your borrowing capacity. A specialist broker or lender can help you with it. Airtight figures are desired. Is there a need to sell off the units from the plan? Do you want to retain some in the form of investment properties? Do you plan to reside in one while selling off the others? Develop a clear strategy and be prepared to face application complexity. 

What the lender will require for approval?

The lender will need you to prove the viability of your planned commercial development project. It will include development experience, working capital, build timeframe, design plans, and concept, builder experience, and expertise, total project cost, etc. Also will be essential contingency fund proof, zoning information, sales costs, permit/development application, completed properties’ plans, and sales costs. They are vital documents and can help secure a commercial loan to ensure property development.

Preparation to make pre-sales

Bigger projects desiring loans will benefit from this tip. A few lenders may require certain pre-sales to be performed to reduce their risks. Pre-sales of 50 to 60 percent might be desired before you are provided with the loan amount. From pre-sales, funds cannot be used for funding any project. Discuss with the bank/financial to know what pre-sale numbers they desire. 

Alternative funding sources

Besides banks, you can come across numerous financing options and lenders in the market. You can find second-tier lenders. Although banks are somewhat smaller. They are enticed by the interest that comes with a good loan amount. Other options available are joint venture and private funders. The latter may come with varying terms and conditions. A joint venture funder will require a stake in profits earned. 

Collateral or security

Lenders generally prefer to avail security against their loans. As collateral, you may need to provide them with an asset that the bank will claim in case you fail to make the payment. It can be some existing property like your own home or land. It can even be your property-related equity, based on the amount present. Properties being developed might be desired to be listed as security.