How Do You Finance a Construction Project?

Deciding to take on a construction project is not a decision you should take lightly. There are many different elements that have to be planned for; and a few that you can't plan for.

On top of finding a plot, getting blueprints, permission, and finding good builders, you need to have the funds available to complete the project.

There are 3 clear stages for funding a construction project:

Stage 1 – The Plan
You don't just need a building plan; you also need a detailed cost analysis. This means knowing exactly what the land will cost you, how much the materials will cost, and even the labor rate. You'll also need to allow for unforeseeable issues and take into account any funds you already have available.

This may seem like a lot of work but it is essential if you're looking for construction finance. Having a plan shows that you're serious about the build and that you have evaluated all the potential issues. It will give a financial backer confidence that their investment will be worthwhile.

Stage 2 – Getting The Finance
You can ask rich friends and family, you can also take out a second mortgage on an existing property, or you can even talk to your bank.

But, these solutions are unlikely to give you the funds you seek. Instead, you need to approach specialist capital partners. These are firs that lend exclusively to construction projects. They will be familiar with the risks, the rewards, and what is involved in the project.

By showing them your plan they will be able to assess the likelihood of success and the realistic value of the finished build. This will help to assure them their money is safe and finance your construction project for you.

Of course, there will be conditions attached and they are likely to want you to repay the funds as soon as the build is complete.

Stage 3 – The Funds
Despite having assessed the risk a construction finance firm will still opt for caution. They are likely to release the funds in three clear stages for you only releasing the next lot of funds when they've confirmed the appropriate stage has been completed.

Funds will normally be released at the start, after completion of the foundations, and then after the house is built; before the internal features are developed.

As mentioned, the finance company will almost certainly expect you to repay the funds within a number of days of the project being completed. At this stage you'll have a fully built house which you should be able to get a standard mortgage deal on; allowing you to repay the capital borrowed and still have some equity in your new home.

Of course, if you're building to sell then you'll need to pay particular attention to how long the period is before you have to repay the funds; you'll need to sell the completed property before that date.

You should shop around to find the best lender and it is important to check your credit rating before you start the project; the better it is the easier and cheaper it will be to get finance.