Financing for Property Conversions and Extensions – Flats, serviced accom’, HMO’s, B&B’s etc
2nd February 2024
By Alex Walker
Financing Property Conversions and Extensions : Key Considerations and Strategies
In today’s property investment landscape, property conversions & extensions are creating quite a buzz. If you’re new to this domain, it’s essential to understand the key considerations before delving into financing property conversions. This article and video will shed light on the factors you should keep in mind to ensure your project’s success.
The first and foremost step is to determine the profitability of your project. Don’t forget to include the cost of financing in your profit calculations. If the financing costs eat up a significant portion of your profit, your project might not be viable. Lenders will also assess the project’s potential profitability, so ensure your numbers align. Getting finance on a project which the lender feels is unprofitable will be very difficult.
Types of Property Conversions and Extensions
Property conversions encompass various possibilities, including:
Residential Conversions: This involves converting commercial spaces into residential properties or extending existing homes.
Hospitality to Residential: Transitioning a bed and breakfast or other hospitality property into serviced accommodations or flats
Commercial to residential or mixed use: an example could be converting a pub to an office / shop on the ground floor with flats above.
It’s essential to clarify the type of conversion you’re planning, and the elements of commercial / residential use as this will affect the financing options available to you.
Key Considerations for Financing Property Conversions
When seeking financing for a property conversion, certain key considerations must be addressed:
Property Value and Equity: Determine the property’s current value and the cash you’re willing to invest.
Project Costs: Calculate the costs associated with the conversion, including renovation and construction expenses.
Projected Property Value: What will the property be worth after the conversion is complete?
Available Cash: Assess how much cash you have on hand to contribute to the project and when .
Exit Strategy: Determine whether you plan to sell the property or retain it for rental income. Lenders assess the viability of your exit strategy.
Credit history: this is more important if your exit is refinance – we need to evidence there is a lender prepared to offer your terms taking in to consideration and poor credit.
Your experience level plays a crucial role in the financing process. Lenders are more inclined to work with individuals who have relevant experience. The larger the project, the more experience lenders typically require. If you’re new to property conversions, lenders may be more cautious. However, if you have experience in buy-to-let or smaller renovations, it demonstrates better competence to manage similar projects.
Who Will Manage the Project?
Another factor lenders consider is project management. Are you planning to oversee the project yourself or will you hire a contracts manager? Your choice impacts the lender’s confidence in the project’s success.
Exploring Financing Options for Property Conversions and Extensions
Property conversions are currently making waves in the real estate market. As this trend gains momentum, it’s crucial to understand the full spectrum of financing options available to ensure the success of your conversion project. In this article, we will delve into the intricacies of various financing methods and provide you with a detailed overview of each.
1. Bridging Finance: A Versatile Solution
Bridging finance remains a versatile choice for property conversions. However, its suitability depends on the extent of cash you are willing to inject into the project. Within the realm of bridging finance, there are various nuances:
Standard Bridging: This is the traditional approach, where you secure a bridging loan to acquire the property.
Heavy Refurbishment Bridging: In this scenario, your bridging loan not only covers the property purchase but also includes a substantial chunk of funds dedicated to renovation or refurbishment work. This method has the advantage of streamlining the process, eliminating the need for multiple survey visits and continuous oversight.
Staged Development Bridging: When your project requires a gradual, phased approach due to limited cashflow, staged development bridging can be the solution. Lenders release funds in stages as the project progresses. This allows you to complete portions of the project and increase property value before drawing down more finance. However, lenders will carefully monitor each stage, ensuring that you meet milestones.
2. Offering additional security:
Leveraging equity from other properties is another financing avenue for property conversions. This can be particularly valuable if you are short on available cash. Different options to consider include:
Offering your bridging / development lender a charge secured on other property you own. Most prefer a first charge so there needs to be no mortgage in place. However some will take a second charge up to 60/65% of the property value. Therefore any existing mortgage needs to be at a far lower LTV to make this viable and worthwhile.
Secured Loans on Residential Properties: You can secure a loan against your primary residence or other residential properties that you own. often lending can be offered at higher LTV’s than bridging or development finance, therefore releasing more cash. This chunk of cash can be used to bolster your conversion project.
Secured Loans on Commercial Properties: While securing loans against commercial properties is possible, it’s essential to note that the options in this category are somewhat limited and often come with higher costs. Nevertheless, this avenue is worth exploring if it suits your situation.
Secured loans can serve as supplementary funds, distinct from your primary development financing. Therefore used for virtually any purpose and with less oversight. This is often a preference as it gives the property owner more control
3. Remortgaging: Unlocking Equity in Existing Properties
In some cases, you may opt for remortgaging existing properties to access additional funds for your conversion project. This approach involves refinancing your properties to release equity and cash. Like taking out a secured loan this gives you cash flow and more control. However, it’s important to weigh the costs associated with re-mortgaging against the benefits. always speak to a mortgage adviser who also understands bridging and development
A Holistic Approach to Funding Your Property Conversion or Extension Project
The choice of financing method will be heavily influenced by the amount of cash you can personally invest and the specifics of your project. Evaluating these financing options in detail, along with your available capital, will help you make an informed decision. The key takeaway is to ensure that your chosen financing method aligns with your project’s unique requirements and maximizes its potential for success.
Focus on Profit and Presentation
In summary, a successful property conversion project hinges on profitability, experience, security and presentation. Ensure that your calculations include all financial aspects, including financing costs. The more professional and prepared you appear to lenders, the better your chances of securing financing.
Remember, a profitable project is not only good for you but also for the lenders. They are more likely to support ventures that are likely to succeed. Property conversions continue to gain traction in the market, and being well-prepared can set you on a path to success.
For more in-depth information on bridging or development finance, be sure to check out our YouTube channel or find out more on our website.
Promise Money is a broker not a lender. Therefore we offer lenders representing the whole of market for mortgages, secured loans, bridging finance, commercial mortgages and development finance. These loans are secured on property and subject to the borrowers status.
More than 50% of borrowers receive offers better than our representative examples
The %APR rate you will be offered is dependent on your personal circumstances.
Mortgages and Remortgages
Borrow £270,000 over 300 months at 7.1% APRC representative at a fixed rate of 4.79% for 60 months at £1,539.39 per month and thereafter 240 instalments of £2050.55 at 8.49% or the lender’s current variable rate at the time. The total charge for credit is £317,807.66 which includes £2,500 advice / processing fees and £125 application fee. Total repayable £587,807.66
Secured / Second Charge Loans
Borrow £62,000 over 180 months at 9.9% APRC representative at a fixed rate of 7.85% for 60 months at £622.09 per month and thereafter 120 instalments of £667.54 at 9.49% or the lender’s current variable rate at the time. The total charge for credit is £55,730.20 which includes £2,660 advice / processing fees and £125 application fee. Total repayable £117,730.20
Annual Interest Rate (fixed) is 49.7% p.a. with a Representative 49.7% APR, based on borrowing £5,000 and repaying this over 36 monthly repayments. Monthly repayment is £243.57 with a total amount repayable of £8,768.52 which includes the total interest repayable of £3,768.52.
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME
REPAYING YOUR DEBTS OVER A LONGER PERIOD CAN REDUCE YOUR PAYMENTS BUT COULD INCREASE THE TOTAL INTEREST YOU PAY. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
Promise Money is a trading style of Promise Solutions Ltd – Company number 04822774Promise Solutions, Fullard House, Neachells Lane, Wolverhampton, WV11 3QG
Authorised and regulated by the Financial Conduct Authority – Number 681423The Financial Conduct Authority does not regulate some forms of commercial / buy-to-let mortgages
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