Investing in and undertaking a buy-to-let residential development project continues to be a popular and reliable strategy for people looking to secure a steady stream of rental income and long-term capital appreciation in the UK property market. However, undertaking such a project requires large amounts of careful planning, a thorough understanding of the market, and often, access to suitable financing options.
In this guide, we’ll provide a comprehensive overview of development finance for buy-to-let developers in the UK, covering what options are available to you, and if there are any differences from other forms of finance.
What is Buy-to-Let Residential Finance
Buy-to-let residential finance is simply a form of financing that is used to fund the building of a residential property, with the intention of renting it out upon completion. If you don’t have the funding yourself, residential development finance is often the only way to complete the project.
In many ways, buy-to-let finance is no different from other forms of residential finance. The lender will still need to see:
- The costs of purchasing the land (if required)
- The projected costs of construction, including legal and professional fees
- A detailed project plan with timescales
- The projected value and rental income of the property once complete
- An exit plan – i.e. how you’re going to repay the loan
The only difference is that for a buy-to-let residential finance agreement, you’ll be keeping the property when it’s complete, and the repayment of the loan is most likely to come from the conversion to a buy to let mortgage based on the updated value. This will then be supported by the rental income. In other forms of finance, the loan is repaid upon the sale of the property or as a percentage of the equity.
What are the different types of residential buy-to-let finance?
There are several potential property development finance options to secure financing for your residential buy-to-let project. We’ve covered them in-depth in our Residential Development Finance Guide, but some of the key information you need to know is below:
Property Development Loans
Property development loans provide short-term finance for the completion of residential projects, often with higher interest rates. A property development loan can be used to fund the whole project as well as the purchase of the land itself. These are best suited to properties that will be sold on completion.
However, it may be the case that you choose to use a development loan to complete the project, and then take out a traditional mortgage to make the repayments.
Bridging Loan
A bridging loan is a type of development loan that is used to ‘bridge’ or a potential funding gap. These are applied for, granted and repaid in the same way as other development loans but are intended primarily to help with short-term cash flow problems. In the case of buy-to-let projects, they can be a fantastic option to start the development before other forms of funding are secured. To learn more, read our complete guide to bridging loans.
Buy-to-let Mortgage
A traditional buy-to-let mortgage is an option for long-term funding. However, most high-street lenders will not provide funding for the development itself, only for the finished property. If you are buying a property to renovate and update it, then this may be different, but if it’s from the ground up, then you’ll likely need a bridging loan or property development loan. You will then be able to explore other options.
Equity Financing
Equity financing is a different option for shorter-term projects. In this case, the lender takes a percentage of equity in your property in return for a cash injection. They take their share of the profit on the rental or sale instead of interest. As a niche option, equity financing is often only for property developers with a proven track record of delivering profitable projects on time and within budget. Learn more in our guide to equity financing.
Due Diligence When Getting Development Finance
Accurate and in-depth financial forecasting is the root of all successful and profitable development projects. You need to work out the cost of land, as well as the costs of materials and construction, legal fees, and potential unforeseen expenses. Likewise, you’ll need to project the potential rental income and factor in ongoing maintenance or management costs and market fluctuations, as well as the potential impact of periods when the property is empty. This will help you assess the viability of the project and the potential return on investment.
Your Exit Plan
Before beginning the development, you’ll need to determine your exit strategy. In this instance, you’ll be renting the property so you’ll have to find a way to repay the development loan. This could be through a traditional mortgage, an alternative way of raising the lump sum such as exit finance or pre-completion finance, or by agreeing on terms that suit both you and your lender. Your planning at the beginning of the project should inform you of how much rent you will need to charge to cover your expenses and repayment.
You also need to consider the wider financial implications. Development for buy-to-let properties can involve complex legal and tax considerations. It’s vital that you engage with legal experts and accountants who specialise in property and development to ensure you’re compliant with all regulations and tax obligations. This can include considerations like Stamp Duty Land Tax (SDLT), Capital Gains Tax (CGT), and Income Tax on any rental income.
Development finance for buy-to-let developers in the UK offers a potential pathway to a lucrative property portfolio, but success hinges on thorough planning, careful financial calculations, and a deep understanding of the property market. At Hunter Finance, we’ve got years of experience in providing property development finance for projects of all sizes. We’re always keen to talk to you and discuss your needs, so don’t hesitate to contact us. We can help put you on path to a successful buy-to-let development venture that generates both rental income and capital growth.
