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Development Finance ROI

When comparing development finance costs, it’s crucial to establish whether the charges are acceptable and will leave you with enough net profit to make the development project feasible. Learn how to calculate returns and what baselines to aim for.

Exploring your return of investemnt before requesting development finance

Development finance carries various costs, and you need to know what profit you stand to make before you consider putting together an application.

Here, we explore what factors will impact your investment returns and how to evaluate the project's viability before you invest any time.

For more information about securing cost-effective development finance, call the mortgage advisors team on 0330 304 3040, or drop us an email at [email protected].

What Size of Property Development is Most Suited to Development Finance?

Firstly, you need to know what sort of scale you're looking at. Development finance can help fund a much larger project than you'd be able to finance independently.

Most lenders require low deposit values. They will lend up to 77.5% of the GDV (the estimated project value once work is completed) and up to 70% of the initial investment to purchase the land or property.

Development finance is an excellent option for vast construction projects that mainstream banks can't fund with different products.

  • Loan details
  • help If the land was purchased within the last 2 years for less than the current land value, we will lend up to 65% of this figure
  • Initial Loan (day 1) must be less than 65% of Initial Land Value (day 1)
  • help Minimum 6 months
  • The LTGDV is higher than 70%. Please review the Initial Loan (day 1), construction costs and gross development value fields.
Instant Results
GDV 0
Initial Loan (day 1) 0
Total Loan Amount 0
LTGDV 0
Day 1 (LTV) 0
Margins at 0
Build Term (months) 0
Minimum Term (months) 0
Assumed arrangement fee @2% 0
Admin fee 0
Exit fee 0
Net Day 1 Advance (after deductions)* 0

How Many Developments are You Anticipating Managing at Once Through Property Development Finance?

Developers who aren't using any finance will need to invest most - or all - of their savings and assets into one development.

You'll need the cash for the land purchase, the build costs, and associated fees until the construction is finished and you can sell the property.

In most cases, that means being able to finance one development at a time.

Development finance means that developers can look to complete multiple developments at a time and not rely on investing all of their savings into one property - which is a much higher risk scenario.

How to Improve the Profitability for Development Finance Lenders?

The return on investment (ROI) is critical - you need to be making a profit to invest time and money into developing a property.

ROI on developments with substantial financing are much higher than independently financed projects. As an illustration, here are two projects constructed by a recent client; one before working with Revolution Brokers, and one funded with our help:

 

Independently financed

Financed with Revolution

Total investment - land purchase and build cost

£3,248,652

£3,248,652

GDV - property value once work is complete

£5,080,000

£5,080,000

Cash invested by the developer

£3,248,652

£650,465

Total loan value taken out

£0

£2,598,187

The total cost of the financing

£0

£209,011

Project profit

£1,831,348

£1,622,337

Return on investment

56.4%

249.41%

This illustration shows that, by investing £3.248 million, the developer made a 56.4% return against a massive personal investment.

By investing a much smaller value of £650,465 and using development finance, they achieved a 249% return - and could finance multiple projects simultaneously.

How Can a Development Finance Broker Help Reduce the Property Development Finance UK Rates I Will Pay?

There are many compelling reasons to consider using an independent, professional development finance broker such as Revolution - and improving your return on investment is an important one!

Lenders look at every aspect of your application. That assessment results in a decision about what rates to charge and whether to accept the application.

As your development finance broker, Revolution ensures that you gain several advantages:

  • Speed - a professional broker has established networks of lenders and excellent working relationships with each. That means we can sound out a potential application before investing any of your time into the paperwork and chase up the progress at every stage to expedite the approval and release of your funds.
  • Troubleshooting - if you do experience delays or have been rejected by one lender, our teams can review your development finance application to identify stumbling blocks and remove them before they cause further issues.
  • Broader lender access - many of the best development finance products are available only as broker exclusives or from specialist providers who don't deal directly with applicants. As a whole-of-market broker, Revolution connects clients with any lender we feel offers the best deal, meaning you get access to a much broader range of lenders than you would alone.
  • Better rates - our experience means we can leverage our knowledge to negotiate lower rates, better terms and more flexible development finance that is bespoke to your project requirements. We also ensure you have absolute oversight over every cost, including potential charges that aren't always transparent in the arrangement process.
  • Full support - we're here to provide help with everything from your initial application through to arranging valuations and deciding the best structure for your drawdown schedule, meaning you have something less to worry about and can focus on making your development as profitable as possible. Ultimately, a broker works with you to ensure you're making the right decisions about the best development finance product, lender and timing, with the overall aim of ensuring your returns exceed your expectations.

Expert Tips to Improve Your Development Project Investment Returns

If you're keen to make your development project a success, there are all sorts of ways to ensure you maximise your profit margin.

Here are some of the top tips from the Revolution Brokers team to reduce costs and improve your chances of turning a sizable return.

  • Do your research before investing a penny. Not all homes make a great project, and some properties take years to appreciate enough in value to justify the expense of paying for extensive renovations.
  • Focus on the basics before you make any grand plans. That means reviewing floor plans, underground piping, and having a comprehensive survey before you start imagining an incredible conversion that will transform the property's appearance.
  • Look for easy ways to add value that won't require substantial project budgets. For example, replacing a tired conservatory, repaving the drive or extending upwards into the loft can make a big difference to older properties, increasing their market value considerably without a massive investment.
  • Investigate what features are proving the most significant selling points on the current market. What properties do estate agents see increasing demand in? During the lockdown, a separate home office or garden room was a huge bonus, for example. A separate annexe on a large property is a serious advantage in reducing stamp duty for buyers and means you'll likely sell faster for more.
  • Consider energy efficiency - something increasingly important to buyers. Different grants are available to help with these projects that might reduce your overall spend to achieve the same result.
  • Don't sacrifice profit for style. As with a rental property, it's crucial to separate personal taste from your investment and ensure you don't spend unnecessarily on features or finishes that won't directly impact the final property valuation.
  • Look at curb appeal alongside living spaces. If you plan to sell the property as your exit strategy, a lot hinges on your ability to list and achieve the sale price you're after. Even a considerable renovation inside won't be reflected on the exterior, so ensure you've provided for landscaping or garden works in your budget.

For more advice about the average return on investment for the type of property developments you're considering or comparing the current rates available on the market, please call Revolution on 0330 304 3040.

Alternatively, drop a message to [email protected], and we'll be in touch to arrange a good time to chat.

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