Property development can be highly rewarding, and securing the right financing is crucial.
In this quick guide, we’ll explore creative financial strategies, covering debt vs. equity, bank and non-bank loans, commercial finance, using other people’s money, and the vital role of due diligence.
Debt vs. Equity: Understanding Your Options
Financing property development requires a balance between debt and equity. Here are some points to help you understand this:
- Equity is the money you personally invest.
- Debt is the money you borrow from a lender.
- A mix of both typically covers project costs.
- Many developers seek the highest loan-to-value ratio to minimise their own financial input.
- While self-funding is an option, leveraging debt can significantly boost returns.
Traditional Bank Loans: What to Expect
Banks can play a major role in property financing, but there are key considerations:
- Banks prefer low-interest, long-term loans (20–30 years) rather than short-term development loans.
- Many banks avoid property development financing, though commercial divisions may fund large-scale projects.
- Today’s banks favour developers with extensive experience and a strong track record.
- Many banks won’t finance projects under $10 million, making funding difficult for smaller developers.
Non-Bank Lenders: An Alternative Approach
Non-bank lenders are becoming a dominant force in property development financing:
- They now finance a significant portion of property developments.
- Their lending criteria differ from traditional banks.
- Interest rates and fees are often higher, but they offer greater flexibility.
- Unlike banks, non-banks may not require pre-sales for larger projects.
- Many non-banks source funds from superannuation funds, leading to higher lending costs.
- They often focus on asset-based lending rather than deep borrower assessments.
Commercial Finance: A Different Funding Path
Commercial finance differs from standard retail finance in several ways:
- Interest is often capitalised (included in the loan rather than paid monthly).
- This is ideal for developers with strong projects but lower serviceability.
Using Other People’s Money: Smart Strategies
Many developers leverage external funds to finance projects:
- Equity partnerships: Using someone else’s property or capital as security.
- Some financiers hesitate when older individuals use their home equity for another’s project.
- A debt-free property typically provides about 70% of its value as usable equity.
Loan Partners vs. Equity Partners: Weighing the Options
When seeking outside investment, you may work with:
- Loan partners – Provide funding but expect repayment with interest.
- Equity partners – Invest capital in exchange for a share of the profits.
Understand:
- Most lenders require developers to contribute 25–30% equity.
- Developers lacking funds may seek joint venture partnerships to meet equity requirements.
The Importance of Due Diligence
Due diligence is critical for identifying risks and ensuring a successful project:
Key areas to evaluate:
- Zoning – Ensure your project aligns with land-use regulations.
- Legal factors – Check for easements, covenants, and encumbrances.
- Financial feasibility – Accurately assess costs, revenue, and loan structures.
- Site conditions – Investigate environmental risks, flood zones, and service availability.
Final Thoughts
Property development financing requires creativity and strategy. By understanding debt vs. equity, exploring bank and non-bank lending, considering commercial finance, and leveraging partnerships, developers can access the funds they need while minimising risk. Above all, thorough due diligence ensures a solid foundation for success.