The Real Estate Financing industry has made it almost impossible to be self-reliant (self-educated) when it comes to property development financing/property development phases.
Companies do this so beginner investors and entrepreneurs rely on professional investment services to take the burden away from them.
Thus, causing them to spend 10x more money than they have to!
PMA curated this informative guide to help mentor beginner investors that are trying to take the leap away from their 9-5 jobs (nothing wrong with having one though) and begin investing in their future.
Now that we know the problem we’re trying to tackle, let’s get into some essential terms to understand when talking about property development loans & financing
Important Terms: Capital Stacks
Just like in any high-end real estate project, there are multiple stages and layers of both funding and construction tasks. Don’t worry! There may be many stages but each one of them is more understanding than the one before it.
An important term you need to know if you’re going to tackle this high-end project to financially secure your future is going to be: Capital Stacks
In simple terms, Capital Stacks in terms of real estate projects refer to the layers of financing that make up the project itself. This term is best used when trying to visualize the priority of the various funds put into the development costs.
Two types of funding most commonly make up the capital stacks of a project:
The software company Finley goes into a crazy amount of detail when it comes to understanding Capital Stacks inside and out.
We highly recommend reading through their articles if you want to better understand that specific portion of project development financing
Raising Funds for the Development Process
At this point, you have already made up your mind about wanting to break into the property development business, either for your own life or investment purposes. Whatever the reason, you should know that real estate development will almost always require outside funding.
Without outside funding, the project itself will be unprofitable and will sweep you into a downright horrendously complex process.
If you remember earlier in the article, we mentioned both debt and equity in terms of the capital stack (very important terms that you’ll hear a million times). These two will be your common forms of raising funds for the property development process.
There are a few options that stem from both choices:
- Crowdfunding: a newer type of fund-raising technique mainly brought about with the new age of social media and digital marketing. By using crowdfunding, many property investors can maximize the amount of capital being funded for projects and deadlines.
- Commercial Mortgages: Very common form of funding! This type of loan is for investors who are trying to fund the development process for a property that is not their home.
- Bridge Loans: One of Professional Mortgage Associates' specialties, a bridge loan is a short-term creative financing solution that umbrella a broad category of QUICK funding options. Such as:
- Private Lenders: Hey that’s PMA! Private hard-money lenders are not associated with any institutionalized banks. Due to this, they can provide out-of-the-box financing options that can be personalized to each borrower's specific project. They also take into account the project's full capital stacks.
- Peer-to-Peer Loans: Definitely a more risky option but still a viable one! Peer-to-Peer Loans are exactly what they sound like: an individual outside investor providing a loan to another beginner investor for their project.
Requirements & Considerations for Property Loans
When it comes to property loans, the real estate financing industry takes every precaution possible to ensure that the entire process runs smoothly. To do this, lenders and investors go through a set of important requirements & considerations before being able to take out a property loan. Some of the most important ones include:
- Property Development Experience
- Strong Financial Status
- Good Credit Score
Just like getting any loan, the process for acquiring the PERFECT property development loan requires a series of steps to ensure success in every aspect:
- You have to do your research
- Sort out all your finances beforehand
- Compare and contrast different loan deals
By repeating these steps, the borrower can solidify that they are focusing on trying to get the best loan deal possible. Profitability is the most important aspect when looking for a loan, regardless of if you plan on living in the property or just investing.
It is extremely important that you know the Requirements & Considerations for different real estate properties: