FINANCE FOR PROPERTY DEVELOPMENT - LARGER PROJECTS & NEW BUILD

DEVELOPMENT FINANCE & CONSTRUCTION FINANCE

This finance is for projects where you want to buy a property that has development potential. This could be a simple renovation of a flat or house, to a complete new build on a new site.

PERSONAL FINANCE

It could require personal finance, where you are doing up or even building your next home (exempt from tax) or it require business finance if you are doing it for profit as a commercial project.

A popular job is to buy a site with a low value building on it like a bungalow or small house then demolish and do new build. Of course size is relative as any size house or houses, factory etc, can be demolished for a new building if the sums work out.

This also has VAT benefits as new build is zero rated (above the foundation line) but renovations are not.

There is some controversy here as it is greener to renovate old buildings to a modern energy specification, than to demolish and build from scratch.

You would normally set up a limited company to receive bank payments as the banks won't deal with you otherwise. You need limited liability in case it all goes horribly wrong.

The main things you want for development finance are:

LOW DEPOSIT FINANCE FOR PROPERTY DEVELOPMENT

Some deals have low deposits, but these are rarer now because of the recession. This is good as you don't tie up too much your cash.

Note that if the interest payments are too high, any profit will be eaten up. So be careful with project planning when calculating costs. Do not be optimistic, as this can lead to expensive mistakes.

STAGE PAYMENTS TO FINANCE CONSTRUCTION

As the work progresses, the bank will release funds usually after completion of specific agreed stages - like, demolish existing building or part of building; or foundations laid.

This means you will need enough cash to cover each development stage before the bank releases the payment. Again, calculate carefully and allow for inevitable delays.

Some financial products allow release of funds before the stage is completed. This is much better as you then have the cash to negotiate with the builders, and also reduces stress.

DIP - DECISION IN PRINCIPLE

You might see DIP on mortgage websites - this is decision in principle - ie they don't think you are totally useless and might lend you some money. The mortgage advisers still have the same old blurbs about easy finance, but that is all so retro now. You will need some serious cash to get started, whatever your track record.