3 Pitfalls to Avoid when Getting a Property Development Loan

Getting a property development loan can open up a lot of opportunities for you as a developer. You need money in order to develop a certain piece of property and make an income from it. The old saying that "it takes money to make money" is very true with property development. Sometimes, it can be a long time between starting a development and actually profiting from it. Therefore, it takes a lot of patience from you and your lender in order to make it work. Finding the right loan and lender is essential to your success. If you choose the wrong loan, you could run into several problems along the way. Here are a few pitfalls to avoid when getting a property development loan. 

1. Short Terms

One problem that many developers run into is that they do not accurately predict how long it will take to develop a property. They might say that it is only going to take a year and it ends up taking three or four. Problems creep up during development and if you are not an experienced developer, you might not be equipped to deal with them in a timely manner. When securing financing for your property, you need to allow plenty of time to complete the project.

If you do not accurately forecast how long it will take, you might find yourself with a property development loan that does not last nearly long enough. You might have a one year loan and by the time the loan is done, you are only a third of the way through the process. The loan balance is now due and you have not made any income. You also will have a hard time refinancing the property because you are in the middle of construction. Make sure that you allow plenty of time with your financing option to finish the property. 

2. Interest-Only Terms

Another common loan term that many developers use is the interest-only method. With this type of loan product, you are only paying the interest on the loan each month. Therefore, you do not ever pay any of the principal balance during the term of the loan. There is nothing wrong with using this type of loan if you know how to use it. In fact, it is very common with developers. 

The problem with this type of loan arises when people do not know how to properly use it. They take out a huge interest-only loan and then make no arrangements for the balloon payment at the end. The end of the loan term gets there and they have this huge payment to make and no way to make it. They end up losing the property or choosing another option that they do not like.

3. Private Investors

Dealing with private investors can also cause problems with property development. You may have to sell a portion of the equity in your company and lose out on the profits that you worked so hard to earn. Private investors could cause you more problems than they are worth.