Real Estate Development Blog
I am thinking about buying a property that has a small vineyard and a lake and xxx acres of undeveloped land. I am a stay at home Mom, but we have several contacts.
I don't have the money they want for the property, but have a banker who is very interested.
Do bankers lend money for potential businesses? I am planning to develop the property with log cabins as a resort/gettaway for families.
What do you think?
From the desk of Colm Dillon ...
Author of "Residential Development Made Easy"
Thank you for writing to me ... I'll try and answer you questions as best as I can.
The simple answer is Yes - bankers do lend money for potential business opportunities. They will however, wrap you up in legal conditions before you get it.
There are two tasks however.
1. If you borrow, the bank usually, and so should you, want some equity in the acquisition.
If you borrow 100% to buy and have no cash reserves, then you have no money to do anything with on the property or pay the interest.
The bank will require you to pay monthly interest payments -- so if the property has no income, you have a problem. Vines are a seasonal income, so that won't help with monthly payments.
If the bank will "capitalize the interest" on the funds you borrow - that means you don't pay the interests monthly, they just add it to the amount owing.
Remember, for you to remain on even keel in terms of land value, the land will have to increase in value at the same rate as the interest you are paying.
So if the interest is 8% capitalized ... then the land will have to increase in value in the marketplace by 8% per annum for you not to be worse off. OK?
You will also require money to pay annual charges levied on the land by the Local Authority in your area.
With my experience in development, I would never go into a development with no equity and no cash.
2. Let's concentrate on the word, "potential" in your question above.
First rule - Land is only worth what you can DO WITH IT.
If you have a 1,000 acres and the Local Authority Rules say that you can only build one house on it then it has a low value.
If however you can build 8,000 homes on the 1,000 acres the land is worth a lot more.
That is what property or real estate development is all about. You don't commit yourself to any purchase UNTIL YOU KNOW what you can do with the land - we call it knowing the "development capacity" of the land.
Before you do any of this work however, you must be sure that the market will buy or rent your end product - you may have a feeling they will, but that is not good enough - sorry - you must back it up with market data.
Now, you should do this for yourself - after all it's your committment, not the banks. However the bank, if they are responsible, should want it too; for your sake as well as theirs.
I have said this many times before, but it is worth repeating for all my readers.
Banks "SELL MONEY" - that's all they do - the shelf price is the "Interest Rate." They parcel up the money in various 'guises' and market to various sectors of the market - with different names, like the home market; the small business market; the XYZ market, whatever.
Banks have salesmen and women who sell money. In fact every employee is supposed to be a salesperson.
Did you know that Banks have "Specials" just like the Supermarket, when they need to get their sales figures Up for the month or quarter?
Hope this helps - I could go on a lot more but all of this stuff is covered in my ebook - remember knowledge is power and let's you sleep well at night.
An ebook is the cheapest investment in the real estate development scene and mine is the only one written that teaches you how to do it. It is hard trying to learn as you are doing a development - so my advise is take the pressure off youeself and learn first.
Bye for now,