Ideas To Financing Your Property Development Project

There are a number of ways for an aspiring property developer - even one who doesn't have a lot to spend-- to get started. Along with individual savings and investment, two standard sources of financing for a venture are loans and investors. A common structure for a development project is 50-80 % debt and 20-50 % equity investment. For credibility and to ensure that there is motivation for the developer, equity investors usually ask a developer to co-invest. Most invest between 5 and 15 % of the cost; a higher investment means more direction and lower rates.

Getting investors takes some work, but it's possible to find them, even for small projects. Local chambers of commerce can point out investment clubs and companies. Search public databases for building permits that contain the names of developers and contractors who may be interested in local investments.

It's important to understand that getting capital is a time consuming, difficult process. In today's financial environment, things aren't like they used to be. Loans have to be secured by cash flow and assets. It doesn't matter who you know, and no matter how good the project sounds to the developer, it will still be evaluated based on its credit risk.

Because of this, it's important to have professionally prepared documents and plans. You can do this on your own or hire a consultant, but there has to be accurate projections and reports like feasibility studies for marketing and finance, business plans and operational plans. It's best to gather potential investors together and present the proposals in a method that is visual and accurate.

Proposals and plans should show a positive project valuation - how much the project will be worth once costs are paid. For developments that will be sold, this is equal to the net sales value after marketing and other costs are paid. For rentals, it's the annual income generated after marketing and development costs are paid.

Another important turn is net operating income or NOI. This is the gross income minus taxes, insurance, utilities, management, maintenance and replacement.

Some other important rates and ratios used to evaluate a project's potential are:

Debt Service Coverage Ratio (DSCR or DCR): the ratio of stabilized NOI to debt service

Loan to Value (LTV): the ratio of the loan amount to the project value

Capitalization rate

Rate of return

Once the project is complete, debt is repaid first then equity is distributed. For a sale, it's all paid from revenue. In a rental investment, a permanent loan replaces construction loan and is paid monthly, with revenue paid to investors after this amount is paid. Investors are paid back in a "waterfall" structure. The first pool pays investors a high percentage of profit - first, a repayment or return on equity, then an annual return that typically equals 9 to 12 percent of the investment. The property developer's investment is reimbursed at the same time, and the developer is also paid any special fees that are specified in the contract.

With a valuable project and a professional approach to presenting it, a property developer can make a vision come alive, build a solid reputation, and earn a generous profit.