A quick overview
From purchasing land to the construction phase, all parts of the real estate development process can be covered by property developer loans. These specialized loans are used to finance property development, helping real estate investors purchase and develop properties and land. For developers, these loans can provide serious benefits, however, there are a few drawbacks to be aware of too, such as the fees and interest rates.
Real estate development can be a rewarding and successful way to invest and get involved with real estate. Whether it’s turning a vacant piece of land into a beautiful apartment block or renovating a property to add an entirely new feel, the act of building and renovating real estate comes with the territory of being a property developer.
Securing financing is critical to the success of real estate development, but options for real estate developers can be limited. That’s where real estate developer loans come in. A property developer loan can provide the capital needed to get projects off the ground. So, if you’re looking for a way to finance your next project, a property developer loan might be right for you. Read on to learn more about these loans and how they can benefit you as a real estate developer.
What are property development loans?
Property development loans are specialized loans that are used to finance property development projects. These loans are typically short-term, high-interest loans that are used to fund the construction or renovation of a property. Property developer loans are often used to purchase raw land, build new structures, or renovate existing buildings.
Real estate development can be a risky proposition, lenders often require developers to put up collateral in the form of real estate or other assets. If the project is successful, the developer will be able to repay the loan and keep the profits. However, if the project fails, the lender may be forced to take possession of the property. For this reason, it is important for developers to carefully consider the risks involved when you finance property development.
Types of real estate development loans
There are 4 types of real estate development loans to finance property development projects that are popular amongst investors.
1. Construction loans
Construction loans are short-term loans used to cover the renovation or building of a real estate project. These loans are specialized financing for developers that are looking to cover the cost of their construction project. Construction loans are usually structured as specific payouts at each stage of the project, instead of a lump sum at the outset. They will often have more stringent qualifying criteria than traditional loans and may have higher interest rates.
2. Acquisition loans
Acquisition loans are specifically used for providing capital for the purchase of land that hasn’t been developed yet. These loans will usually cover the purchase of the land only, and the development of the land will require a separate loan. The types of land or properties these loans can be used to acquire are single-family homes, townhouses, mixed-use properties, multi-family properties, shovel-ready land and more.
3. Development loans
As the name suggests, development loans are used to fund the development of land that has already been purchased. Once developers have purchased the land that they want to develop, they will look at getting a development loan to fund the rest of the project. Development loans can be used for a host of projects including road building, running water lines and anything that needs to be done to the land so that construction can be done.
4. Acquisition and development loans
Developers who are looking for a financial solution that encompasses both buying a property and developing it, can opt for an acquisition and development loan. These loans are divided according to each use, which means that part of the loan is use for purchasing the raw land, and the other part is used for building. This is a versatile loan offering developers more freedom than other loans.
Does it matter of the project is residential or commercial?
Residential and commercial real estate development projects are both eligible for real estate development loans. There are loans geared more towards commercial projects and others geared more towards residential projects. The choice of which loan type to apply for, for either project type, depends on each situation.
Advantages of property developer loans
- Finance any part of the process: Real estate development loans are specifically structured for developers, which means that they can get a loan to cover any part of the development process. This is extremely useful for developers with varying needs, who can gain access to funding for their specific strategy.
- Get funding for different types of properties: Real estate development loans will provide funding on properties that other lenders may not. This is because these properties can be developed into something else.
- Higher loan limits: Developers who use development loans can get access to a larger amount of funds than if they went the traditional loan route. Which means that they can access bigger properties and therefore make more profits.
- Assists cash flow during the build: Developers need to maintain a certain cash flow, and this can be difficult to do while development is going on. Developer loans help with this, and tide developers over until the property can become profitable. Sometimes the entire construction phase can be covered by the loan.
Disadvantages of real estate development loans
- Lender keeps tabs of the project: During the development process, developers will need to answer to the lender who will require frequent feedback and even site visits. This can be an extra burden to manage during crunch time.
- Large amount of information required: It takes time and effort to gather the information needed for real estate development loans. Lenders will require detailed plans and explanations of the entire project, which can be a drawback for developers.
- Financing is costly: Developer loans come with fees and interest rates which will decrease the amount of profit made on the property development project.
Are there other ways to fund a development project?
Developers who are looking for alternative ways to fund real estate development projects have a variety of options to choose from.
- Hard money lenders: Developers can get construction loans from hard money lenders that cover up to 100% of the construction. These lenders will have application criteria that is more lenient, and builders or developers can often get up to $5million in loans through hard money lenders.
- Commercial mortgage: Traditional financing for real estate development involves getting funds from a bank usually. Commercial mortgage loans are a common choice for developers, as well as land loans or construction loans. Banks have a more stringent set of qualification criteria however interest rates may not be as high on a commercial mortgage loan.
- Bridging loans: Many real estate developers choose bridging loans to finance their property purchase before another property has been sold. These loans cover ground-up construction, as well as upgrades to an existing property.
- Private lenders: For developers looking for extremely flexible loan terms and who are willing to wait for the right loan, private lenders are a good option. However, they aren’t as easy to find, and they may not cover the entire project cost and land purchase. Private lenders typically have interest rates upwards of 12%.
- Crowdfunding: Making use of a pool of investors to fund a project collectively, is another good source of finances for developers. Crowdfunding is done online, and simply requires the details of the project. This way of lending is a little more unpredictable however, but it can help less qualified developers get started on their first project.
- Venture capitalist or partner: Finding a venture capitalist or partner allows developers to get the funding they need but still retain control of the project. Developers can often get more funds by going this route, however, getting approval may be more difficult.
Final tips for funding a real estate development
Finding financing for your real estate development starts with gaining credibility. Once you’ve built up the experience working under a successful property developer, lenders are more likely to view you as a credible developer. Your next step is to develop a comprehensive plan. Lenders will need to see your plan for the project, to determine how successful it is likely to be, and therefore how likely you are to repay the loan.
Remember to do your research thoroughly and offer lenders as much information on your project as you can. The more they know about it, the more they can understand and use it to determine if it has good potential. Lastly, keeping your upfront costs as low as possible is a good idea when it comes to getting a loan for real estate development. The less debt you have to repay, the better.
FAQ
In order to finance their projects, developers often take out loans. These loans can be used to cover the cost of purchasing the land, as well as the costs of construction, marketing, and other expenses. Depending on the size and scope of the project, developers may take out multiple loans from different lenders, from commercial mortgage loans to crowdfunding.
In some cases, developers may also seek funding from investors. Ultimately, whether or not a real estate developer takes out a loan will depend on the particular project they are working on and the available financing options.
You don’t have to be a property developer to qualify for a construction loan. However, a construction team or reputable general contractor are often required to be on the real estate development project.
Yes, certain types of real estate development financing can cover the purchase of undeveloped land. Acquisition loans, as well as acquisition and development loans both cover the purchase of land to use for a real estate development project.