Development Finance for Real Estate Investors
Lenders are traditionally reluctant to provide development finance to real estate investors unless these investors have an equity that ranges from 25 to 40 percent of the property value. But there are also some financing companies offer the same kind of deal they give to household mortgage borrowers wherein the buyer can borrow up to 90 percent of the property’s value. It is important to remember that if you intend to go on this venture, there are certain criteria that should be met.
For example, most development finance lenders look into the expected yield of the property, the business plan of the buyer, and the logic behind the expected growth. There are different types of product being offered in the market today. It is critical to choose the right one that will suit your needs. However, finding the right lender and getting the development finance approval are two different things.
There are five elements that lenders look into when they conduct a risk assessment. Understanding these elements is crucial to getting the loan approval. Among the things you need to be aware of include:
• Amount of available equity – it has been mentioned earlier that your equity, assets, and liquidity play a role in determining whether loan applications will be approved or not. This valuable information lets the lender calculate the risk you pose to them and your capability to pay back the loan. If you have a good portfolio, it assures the development finance company that you can manage your assets and you know how to minimize risks.
• Interest rate percentage – generally, it is an accepted practice that the higher the investment deposit you put down, the better rate you will receive. Keep in mind that buy-to-let mortgages don’t typically receive the type of low interest that home mortgage does. But you can still reap interest rates benefit if you put up to 20 to 25 percent of the loan value up-front. If possible, avoid low deposits because it can backfire over the long term.
• Current debts – another area that development finance companies look into is the amount of debts you carry. If you have too many financial commitments, it will decrease your attractiveness as a borrower. Also, your debts establish the maximum loan that can be granted to you for your real estate project.
• Current income – the amount of money you generate each month through salary, business, or any other types of streams will be considered by the financial institution as well. In real estate investment, the lenders may also look into the monthly yield you are receiving from your property portfolio.
• Tax Liability – because real estate property require maintenance costs, mortgage payments, and agent fees among other expenses, an investor can reduce his tax liability against rental profits and capital growth.
Getting development finance assistance from a financial institution is almost always necessary in real estate investing. This initiative can be extremely lucrative if you know how to spot opportunities and minimize risks. The lenders know that the real estate market has a lot of potential but it is up to you to convince them that you are a responsible investor.
