What kind of interest rates would a bank charge a property developer ?

MikeHar

Hi,

I'm looking for a ballpark idea of what kind of interest rate a typical bank would charge now-adays to a small property developer.
eg. Buy a single derelict property in Dublin city centre completely renovated it and flip it. With the way the property prices are at the moment it seems like being a property developer would be a license to print money assuming you could get financing to fund it. So two questions
(i) What %age of the overall development cost would a bank typically be willing to lend ?
(ii) What kind of interest rate would they charge ?
eg, buy a wreck for 300k, spend 200k renovating and then flip it for 750k.
Would a bank lend 100% of the cost ie 500k or would they demand that the developer had 250k of their own money. If they did agree to lend, what kind of interest rate would they be charging ? Is it like 5% or 10% or 20% ?

Thanks,

Mike.

Claw Hammer

The bank wouldn't lend a all in that scenario. Rate of interest 0%

antoinolachtnai

The transaction you are describing is immensely risky. If the property price goes south, or indeed if the cost of labour and materials goes up you will be underwater very quickly. In a downturn the security (the unrefurbished property) would be basically unsaleable.

The bank will lend very little on this. The are companies that might lend on this but by the time it is all done the cost of capital will be very high indeed.

It is a general problem in the sector - banks are unwilling to lend because they just don’t know what sort of state the economy will be in when the property is ready for sale -. Development land is not that much use as security for much the same reason.

OscarBluth

Agree its impossible to get financing in that situation. We looked at it with approval for a mortgage in place and plans to live in the house - buy a derelict house for 300k, spend 200k on it, end up with house worth more than 500k and infinitely nicer than anything we could afford to buy done up. The short answer is, they won't lend on that basis, even if they've agreed to lend you 500k otherwise. You need the cash up front - or to get a mortgage the usual way and buy a house with renovation potential that is still habitable in order to draw down the mortgage.

Cape Clear

MikeHar wrote: »

Hi,

I'm looking for a ballpark idea of what kind of interest rate a typical bank would charge now-adays to a small property developer.
eg. Buy a single derelict property in Dublin city centre completely renovated it and flip it. With the way the property prices are at the moment it seems like being a property developer would be a license to print money assuming you could get financing to fund it. So two questions
(i) What %age of the overall development cost would a bank typically be willing to lend ?
(ii) What kind of interest rate would they charge ?
eg, buy a wreck for 300k, spend 200k renovating and then flip it for 750k.
Would a bank lend 100% of the cost ie 500k or would they demand that the developer had 250k of their own money. If they did agree to lend, what kind of interest rate would they be charging ? Is it like 5% or 10% or 20% ?

Thanks,

Mike.

It if was that simple we'd all be doing it! The truth is many a wannabe property developer and banks got burnt on this type of project back in the day.

Samuel T. Cogley

Anywhere a property is going to sell for 750K, you're not going to find properties at 300K no matter what state they're in.

The only way to do this effectively is by doing most of the work yourself and knowing exactly where to get cheap materials. Plus you need to know where there are a supply of **** properties but inexplicable demand. Rialto is was a prime example.

davo10

Residential development finance is high risk for the lender. Typically the interest rate is over 10%. Senior lenders (banks) will not loan more than 50% of finance and will require full planning and a sound development plan. They also want significant collateral to secure the loan, e.g. your house. Alternative finance providers will only lend to projects over €1m and usually not more than 75%.

Your plan is fraught with risk. Cost over runs/delays or failure to sell in the timeframe set out in your plan would make it a nerve racking experience. And you have to pay capital gains tax on your profit.

. If you can, buy a home with a residential mortgage, live in it for a while and do it up so that you can sell it on without Capital Gains Tax.

The_Conductor

If you had a reasonable business plan- and collateral you were willing to put up- AIB or BOI (and probably others) will lend to you for the project- however, the interest rate would most probably be in the region of 12-15% to reflect the risk involved for the lender........ Yep- 12-15%, you heard right.........

Cape Clear

The_Conductor wrote: »

If you had a reasonable business plan- and collateral you were willing to put up- AIB or BOI (and probably others) will lend to you for the project- however, the interest rate would most probably be in the region of 12-15% to reflect the risk involved for the lender........ Yep- 12-15%, you heard right.........

The rate reflects the risk. Plenty of larger developers are having issues rasing project finance and are having to look beyond traditional sources.

Claw Hammer

The_Conductor wrote: »

If you had a reasonable business plan- and collateral you were willing to put up- AIB or BOI (and probably others) will lend to you for the project- however, the interest rate would most probably be in the region of 12-15% to reflect the risk involved for the lender........ Yep- 12-15%, you heard right.........

Not that kind of refurbishment project. In Dublin city centre rebuild costs are unpredictable. Protected structures, archaeological digs and the possibility of litigation from neighbours, the downside risk is just too high.

Gumbo

About 19% on top of a lump sum to get the money in the first place. That’s based on experience of small developers building 2-8 houses on various sites in Dublin.

Money given on a 12 month expected return.

368100

If....and its a big If they do lend, there'd be a hefty arrangement fee on top of a hefty interest rate

myshirt

It's this type of 'developer' that we don't need in the Irish market, but to appease you if the bank ran with this you'd like get max 60% LTV and an interest rate at mezzanine levels, likely 14-20%.

At the low level of borrowing you have there, wouldn't be worth it for any bank. Too small.

You've also made a few face-palming poor comments. You have to remember, the bank is as much backing the man as they are backing the project. If you don't know what you are talking about, it doesnt bode well. Leave it.

MikeHar

Okay, so the consensus seems to be that one would need 50% up front and you'd pay ~15% on the other 50%.
Sounds like a plan.

Thanks,

Mike

L1011

Value after refurb is costed in to sale prices of derelict properties to a huge extent in Ireland so the margins you imagine do not exist

washman3

Cape Clear wrote: »

It if was that simple we'd all be doing it! The truth is many a wannabe property developer and banks got burnt on this type of project back in the day.

And the taxpayer was left to pick up the tab.:mad:
Cant believe that there are still out there thinking like the OP.
Were any lessons learned.?

Victor

MikeHar wrote: »

...and flip it ...

Hello 2005, my old friend.

Unless you have a very sound business plan, this is not how things work.