Why you should take a loan and become a property developer
Borrowing money for development if you're an established property developer is relatively easy, but the crash rate for property developers is high and many first-time property developers soon get in over their heads. Consequently, borrowing money for your first development can be difficult. Here are suggestions for overcoming the difficulty and some sources for borrowing property development money and learning the basics of the development process.
Acquiring a Track Record
The first step in property development is to acquire the credibility you need to prompt a lender to fund your first project.
The best way to overcome this problem is to gain experience that counts toward a track record before trying to borrow. A job with an established property developer gives you some credibility. If you're a smart, dedicated, consistently good worker, the developer you're working for might go into partnership with you on your first development, giving you the funding credibility you need.
If you have funds to begin with, consider seeking out a reputable small-scale residential developer to partner with in a project the two of you would co-finance, with you serving as a junior development partner and learning on the job.
If property development is a retirement project – meaning that you have retirement income to sustain you while you get started, join one of the many nonprofits devoted to affordable housing to get the experience you need. Habitat for Humanity is the best known, but there are several organizations with similar missions in most communities.
Without prior experience, you may still find funding sources, but they may be limited to private loans and angel investors.
Developing a Plan
Before approaching funding sources, you need to develop the project to a point where it's attractive to others. In almost all cases, small developers begin with residential projects of one or two houses at a time. Since acquiring funding may take several months by which time the property you want to acquire may be sold, identify several available vacant lands for sale – perhaps six to 12 different properties. Treat some of these as available backups and develop plans for two or three in detail. Be thorough in researching any zoning limitations and special conditions for each property, such as access easements and utility easements.
The more information you can provide, the more assured your potential lenders will be. Research "comps" – other similar, recent property sales – to establish that the sales prices for your lots are reasonable. Develop one or two simple graphs for each property that illustrate the percentage change in neighborhood property values over the last three to five years. Figure out what kinds of housing sell best in these neighborhoods and develop a housing plan for each of your two or three primary properties. These should include preliminary sketches that make the project real in the eyes of your prospective lenders.
Preparing building cost estimates is essential. These should include materials, labor, overhead and profit, as well as planning and building department permits and fees and a 15 percent contingency fund. When you're researching costs, it's a good idea to run each prospective plan by your locality's building department and your local planning department.
The last step in preparing to present to your lenders is rehearsing how to pitch your plan. You want to be able to describe the project quickly and convincingly. Don't get lost in detail; if they're interested, you can go into detail later. The initial pitch should take only a few minutes. Being able to recite facts and dollar amounts confidently from memory assures lenders that you've put in the time to develop the property at a profit.
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