Utilise The Common Sense Approach…
For any property developer, this is no greater joy than watching a property development project come to life; building the homes from scratch, advertising and then selling the units at a profit is the ultimate ‘water into wine’ scenario. However, it is often the case that these development projects are either poorly funded, or the cost of the project steadily increases to a point where the initial investment has all been spent, leaving the developer with half built properties that are unsellable and cannot be progressed any further. A lot of new property developers forget about financing the project and calculating their ROI, and this is a fatal error. This guide is just for finance, and is not intended to help strategise the project itself. With some forward planning, the risks cannot be eliminated, but they can certainly be minimised.
Taking a Personal Loan
This may sound like an easy option but it can be costly in the long term. Unlike a business loan, where liability is limited to the organisation, a personal loan taken out to service the business’ needs can backfire if the project folds. The individual has technically taken the loan out in their own name, and will be pursued regardless of the outcome of any business project. Furthermore, it is unlikely that any personal loan will provide the amount of capital required to see the project through.
Going Into a Partnership
This is a more realistic way of raising some extra capital, especially if the partner is the ‘breadwinner’ in the team. However, it must be remembered that, like any financial agreement, the profits will ultimately be lessened, and creating and directional input will nearly always be limited when a second party is brought on board.
If planning on raising a large amount of capital and are considering remortgaging, using a mortgage broker to see the best deals is a must. This is a source of finance that has come from the investor putting their own property on the line, so the best repayment terms, lowest interest and not forgetting the highest cash offer are of the utmost importance. Again, however, this is a personally driven finance option; if the corporate side folds, the debt is still payable.
Branching Out In An Existing Company
If already running a company, there is no immediate harm in using the income generated to branch out and use the cash as an investment in property. A safer method than personal refinancing, it limits liability for the individual, and utilises funds that would normally be sat dormant by turning that profit into a potentially even more profitable venture. It is advisable, however, to keep the two businesses separate; if one side folds, the professional reputation of the company from which the funds have been borrowed is unharmed.
Selling Properties Before Completion
Rather than sink money into a project and then try to sell the houses, a newer cash flow method involves selling properties at a slightly reduced rate in order to raise funds and impress potential investors with ‘early sales’. Buy-to-let is just one such method alongside ‘first time buyer’ initiatives. The profit is lower, but it means less borrowing, less interest repayments, and quicker return on investment.
It is not possible to completely foresee the future. Housing investment is not an exact science, but by utilising some savvy techniques, the road can be made signicantly smoother with less financial outlay by the developer, and bringing the project one step closer to success.