If you are new to financing real estate development you’ll have to change your thinking. No doubt you are very familiar the 15 to 30 year mortgage finance tool.
You may even have used a ‘Line of Credit’ as an alternative way of financing as you increase you cash wealth. Both of these methods are used primarily for financing real estate property acquisitions.
I can hear some of you say, “But I used these for redeveloping a house or a few apartments.”
Well that is not what we, in the development world, mean when we say real estate development; we call that a renovation or a refit.
So financing real estate development is financing a completely new development and mortgage financing is not the correct tool for the job.
So How Do They Differ?
The easiest way is to give you a quick comparison between a mortgage financing and financing real estate development.
With a mortgage you essentially are buying property; be it land or a residential house on land, or an apartment … and you are buying it to own for the long term; that is 15 to 30 years.
When financing real estate development you are looking at financing an entire project, of which the land is one tangible part and the other part comprise building Plans.
At completing of the project you plan to sell all of what you have created and repay the financial institution what you borrowed for financing real estate development.
You might ask, “What if I want to keep some of what I have created and not sell everything? Great question.
The answer is simple. All the money you get from the sales of your product is paid back to the financial institution and you then take out a long term mortgage for the product you want to own long term.
Just to be clear on that point
All of the products you sell will include a profit. So by careful calculation and planning you can balance the number of products you retain, so that your profit is left as equity in the investment and the amount of mortgage borrowing is minimal.
Depending on your taxation rules in your country, leaving money in the investment as suggested, is a way of not ‘realizing’ your profit in a cash form and so attracting tax. But naturally you should check out your local tax laws.
Now back to financing real estate development.
As mentioned earlier, you are not just buying land when financing real estate development. You are asking the financial institution to approve the purchase of the land, as well as the construction of the whole project.
To arrive at the position where you can make a Financing Real Estate Development Application, you will need a set of approved development plans, costings and a Real Estate Development Feasibility Study.