If you’ve been growing your property portfolio and have a few conversions and refurbs under your belt, you might like the idea of becoming a developer and building a multi-home project yourself.
You may have been watching Grand Designs, the Big Build and other similar TV programmes and feel ready to tackle a bigger project with homes to either rent out or sell. However, it’s not as simple as a straightforward conversion.
Firstly, you’ll need specialist development finance - not a self-build mortgage or even a bridging loan.
Almost without exception development finance lenders want provable, documented, comparable experience that the borrower has successfully completed a project similar to the one they’re now seeking to fund.
These lenders have a policy of putting up barriers to entry and this lets them cherry-pick the projects that they see having a high chance of success. Development finance is not given for ‘on the job’ learning.
They want to see that you have a project that can show what you’ve built, how much the site cost, how much the build cost, how long it took, the sale you achieved and profit you made. You might have done 20 refurbs including some structural refurbs, but that’s not a new build.
Similarly, if you have new build experience, but it’s for a single unit and now you’re looking for funding for a 20-unit new build, you haven’t shown you are capable of successfully delivering that size of project.
The secret is to find someone who has the experience or cash you lack, joint venture (JV) with them and piggy back on their experience. This will make you collectively acceptable to a development finance lender.
The obvious choice of JV partner is a builder, but equally valid choices would be an architect or a building project manager.
Usually a limited company is set up for the sole purpose of this project, known as a special purpose vehicle (SPV), it would be wound up when the project is completed and the profit distributed.
The added advantage of an experienced JV partner is that you have someone who can guide you around any expensive potential pitfalls. Then next time you can go it alone!
Self-build mortgages do exist for a main residence, but if the lender suspects that you’re borrowing a self-build mortgage and planning to develop and sell on, they can pull the funding at any point, regardless of what point the project has reached.
With your JV partner you’ll not only have considerable expertise to call upon, but you’ll also learn a lot - and then next time you can go it alone!