Do you need a ton of cash to become a property developer? The answer might surprise you!
Believe it or not, armed with the right tools, contacts and information you can become a land developer and build your first project. Of course you can have all of these things but you still need the money to make it all happen. In order for this to happen you will need a development loan to finance land, development, construction and other expenses.
What types of land development loans are there? And how do you obtain a property development loan to make your first project become a reality?
Different Types of Development Loans
Acquisition Loans:
An aspiring developer may have his/her eyes on a piece of prime real estate. When you get an acquisition loan you are purchasing a raw piece of land to get ready to build on at a future date.
Sometimes land developers will purchase a piece of land with an acquisition or land loan and hold onto the property until they decide what to do with it or maybe they are waiting until circumstances become more favorable so that they can build.
You can also use an acquisition loan to purchase a piece of land and make it your own before someone else buys it and you lose out on a sweet deal!
Typically for a lot loan you will need 10-20% down to acquire the land. For raw land you will need 30-50% down to acquire the land.
Whatever you use an acquisition loan for you will need to get additional funding once you decide what you are going to do with it. This is where a land development loan comes into play.
Land Development Loan:
The next step will be to get a land development loan. This is used for improving the land and getting it ready for construction. You may need money to tear down existing construction, laying pipes, building infrastructure and roads as well as setting up construction for a new site.
Acquisition Development Loans:
These loans are an acquisition loan and land development loan combined. If you have a piece of raw land in mind and are ready to build, an acquisition-development loan is the logical choice.
If you’re looking to get financing for both the property site purchase, and the development itself, most lenders will require a deposit in the range of 25-40% of the site’s value. This will leave you with a loan-to-value (LTV) of between 60-75%.
Construction Loans:
Construction loans finance the new construction or the renovation of structures. Once the land is ready to build on you will need a construction loan to make this happen.
Commercial construction loans are different from your typical commercial loan.
How they work:
- You will need a draw schedule with your lender. Once you’ve reached a finished point in construction then you will get a disbursement from the lender to cover the expense incurred during that phase of construction.
- You are allowed to make interest only payments during construction on only the amount you’ve drawn to date.
- You will be required to pay off the remainder of the loan within a short period of time after construction is completed. In most cases the construction loan will be flipped into a longer term permanent loan either with the existing lender or a new one.
Typically, commercial construction lenders will not finance 100% of a project. What they will finance — called the loan-to-cost ratio — usually ranges from around 70% to around 90%. Loan to cost is based on the cost of the project, not the appraised value after its completion. You’ll have to cover the cost of the rest of the project, usually by making a down payment.
How to Improve Your Chances of Getting a Development Loan
- Gain Experience:
If you don’t have experience in land development then you can gain this experience by working with other land developers. Take courses and gain certifications to help you appear more professional to lenders.
Having experience owning your own business and investing in real estate will help. If you are in a situation where you can fund your first project this will help immensely.
Another option is to bring on an experienced investor or partner to help you on your first deal.
- Create A Plan:
It’s important to have a detailed plan of all phases of your property development project. Your plan should include where to build, why you are choosing a specific location, what kind of property you want to build, and how long the project will take. Include a construction timeline and what you will do when the project is complete.
The more detailed the better because it will increase your chances of finding a lender willing to fund your project. Your plan should also include in depth research on your target market. Study everything from demographics, prices, population trends, employment data, zoning laws etc. For a more detailed overview, check out this article on how to create a property development plan.
- Create a Pro Forma:
A pro forma is a document that contains a property’s cash flow projection. This will show the property’s potential ROI.
A pro forma should include projected fees of the development, including land acquisition, construction, management, and overhead, as well as the projected revenue determined by the sale or rental of each unit.
A solid pro forma will show that you understand the numbers and that the project makes sense to a lender/investor.
- Develop a Convincing Pitch:
Once you have investors or lenders that are willing to listen you will need to sell them on your vision! Keep it simple. Start with a problem and how your development project will be the perfect solution. Be passionate about how your project will improve the community and back it up with research.
A solid strategy backed by convincing data, along with a passionate belief in your vision will help you find an investor/lender to back your project.
Sum It All Up
Of course this is an overview of what you will need to know to get into property development. It goes without saying that the more research you do, the more experience you have and the better prepared you are the greater your chances of success.
So do you need a ton of cash to become a commercial land developer? Not as much as you might think. If you can do all the legwork then you can bring a solid deal to an investor that will provide you with money down and a lender to finance the rest. You might not need anything at all!
It is always a great idea to find investors and have experienced property development partners if you want to increase your chances of success.
Synergy Commercial Funding has a wide variety of options for the first time and experienced developer/commercial real estate investor. We offer all types of loan products from raw land purchases to development and construction. From a single lot to building entire subdivisions, from horizontal to vertical, we have you covered!
Interested in creating a second line of income just by talking with your existing network? Want to help the economy grow by helping businesses around you grow? Think about becoming a Synergy Commercial Funding Partner.
Are you looking for financing options for your business? If so, Synergy Commercial Funding is ready to help. We offer a wide range of commercial finance services to help businesses of all sizes achieve their objectives, whether it’s purchasing new equipment or purchasing a new commercial property.
Interested in creating a second line of income just by talking with your existing network? Want to help the economy grow by helping businesses around you grow? Think about becoming a Synergy Commercial Funding Partner. Visit our "Referral & Broker Program" to learn more.
