What is Development Finance? A Guide for Property Investors
Property development finance is a short-term loan for residential property developments, such as refurbishment projects or construction, that is usually based on gross development value - ie what will the site be worth when the refurbishment or construction project is finished - that is then paid back in stages.
How Does Development Finance Work?
Amy: Can you tell me, Rory, what is development finance and how does that work?
Rory: Sure. So, often, investors will confuse bridging finance with development finance.
So, just to go back very clearly, with a bridging finance, bridging loan, you'd get the 60% that we've talked about, a few moments ago and it's generally one advance.
With development finance, what we're looking at is buying - could be a site or a property that will convert. And, essentially, we're looking at the gross development value - ie what will the site be worth when we've finished the refurbishment.
So, let's say, we're buying a property to split into two properties.
If the gross development... So, whatever the gross development value would be, to work out how much money we could borrow, for development finance, we'd normally take 50% of the GDV.
And so, let's say, the gross development value was a million pounds. So, the facility would be half of that, five-hundred thousand. Now, we start to break development funding into two elements.
One is, a proportion of the money will go towards the refurbishment or conversion cost and that's normally 100%. But it's done in arrears and it's done in stages, which means, in that example, there, the property is worth a million.
Let's say the facility is 500,000 so, the refurb is 300, that 300 might be paid in four instalments so, that would be 4 lots of 75.
So, you have to have a little bit, upfront, out of your own pot, to pay towards... at the start.
The balance of the facility, for development funding, goes towards the purchase price and that is normally no more than say 50% of the purchase price.
So, keeping it simple, we work out the GDV (Gross Development Value), half of that is the total amount we can get. All of the bill-cost, in arrears and in-stages and then up to 50% of the buy-price, as long as it doesn't exceed more than, say, 50% of GDV
But what you can do... Do you remember earlier, I said, if you have an unencumbered property, that has no debt, you could throw that into the mix, to get a little bit more money, as well?
Amy: That's great, thank you.
Rory: Okay, just one other point with development funding.
Obviously, in that example there, we said, there are four drawdowns.
So, the lender will instruct the QS, quantity surveyor, to go and inspect the works that have been done by the developer and check if everything's fine.
They'd write a report and confirm and normally, within 24-48 hours, the funds would be advanced.
So the money is released in stages.
Amy: Thank you.