Many people are afraid to start out in property developments because they think that to become a successful developer, you need to be born rich, have access to a big trust fund or have saved up millions before you can take the first step.
This simply is not true. Anyone can start their own real estate project, regardless of their background with no money down. All you need is the right skillset and experience to guide you through the process. Once you have completed your first project, it becomes a lot easier to raise money for the next one, whilst you sit back and let it earn passive income.
'You don't need to be born rich to be a successful property developer. The key is to have the right tools and experience to guide you.'
Anyone, regardless of their education or financial background, can learn to use basic tools to develop a property. Figuring out how these tools work for you is a fun way to test how you can enter the property market as an owner or developer. Consider applying for the Advanced Property Program here, to learn how to used these development tools to unlock property wealth.
Three ways to Start with No Money
Are you looking for ways to get started in the real estate development space with no money? Here are three examples of how you can get started with your first property development with no money down.
1. Raise capital against land
If you are fortunate enough to own the land that you are wanting to develop, you may be holding the key to unlock your entire project. The property usually represents a large portion of the total value of a development, and it’s worth can easily be demonstrated to banks and other investors by carrying out a property valuation. Depending on the structure of your development company (read more on SPV’s and how to set up a development company here), the land may represent a significant equity stake in the overall development.
For example, if you own a property worth R5 million, your equity contribution could raise a further R20 million towards your project, based on an 80% development loan. Your total development cost can then be calculated as follows:
Land Value = R 5,000,000
80% Gearing = R5,000,000 /20X100
= R25,000,000 Total Development Cost
In this scenario, you have raised R20,000,000 of funding by purely relying on the inherent land value, and without putting in one cent of your own capital!
2. Partnership
When structuring a new development, one option to raise additional equity is to attract a development partner. This partner should ideally take on an equity finance position in your property development. By increasing the amount of equity available to the project, it allows you to enter into larger transactions without overextending your available resources. When short of capital for a project, taking on a financial partner is also seen by the senior debt lender (the bank) as a means to reduce risk and distribute the project exposure. The format of the equity arrangement is typically structured as a percentage shareholding calculated on a rand-for-rand basis in proportion to the total development value.
Using the same example as before, a partnership could be structured as follows.
Firstly, assume that you have purchased the development property using a bank loan, so you require further equity to develop.
Say, for instance you have purchased the property for R5,000,000, but your deposit was only R500,000 and you owe R4,500,000 to the bank (in the form of a bond). In this case, you could argue that by making simple improvements to the land, such as a rezoning or upgrade (refurbishment), the land value has increased to R8,000,000.
On this basis, you can enter a development partnership with an investor, on a 40:60 basis. This means that you retain 40% ownership and sell a 60% stake to your partner. Due to the increased land value, the 60% share of the R8,000,000 development is now worth R4,800,000. This contribution can be used to settle your outstanding bank loan, and still have a remainder of R300,000 in cash.
Now, with a total of R8,000,000 in equity in the deal, you can jointly apply for finance with your new partner, and raise a development loan of R32,000,000!
Land Value = R 8,000,000
80% Gearing = R8,000,000 /20X100
= R40,000,000 Total Development Cost
All this value can be unlocked towards your development without needing to spend a single cent!
3. Development Pre-sales
The third option is to launch a new development into the market and secure a proportion of pre-sales. This strategy relies on a sales model and can be carried out without even having purchased the property on which the development will be built. By making use of a skilled architect, you can draft your vision on the property that you think is ideally suited for development and take your product to the market. There are several crowd-funding platforms that can also be explored as a means to generate property sales based on a speculative project.
It is advisable to obtain permission from the landowner before you launch your product, and even to sign an MOU (Memorandum of Understanding) as this will secure your involvement or stake in the final development.
Once a certain portion of pre-sales have been secured, you can approach a financial institution, investors, or the landowner themselves to proceed with setting up the final development structure. An example of this structure could be as follows.
Total Land Value = R8,000,000
Total Development Cost = R40,000,000 (as per above example)
Architect design shows 50 apartment units, which can be sold for R1,500,000 each = R75,000,000.
Total pre-sale requirement from the bank = 100% loan value = R32,000,000.
This means that only 22 apartments need to be sold upfront.
22 apartments X R1,500,000 = R33,000,000.
Once the pre-sales have been achieved, your development funding will be unlocked, and you can commence with the project, not having spent a single cent of capital.
Consider joining the 5 week Advanced Property Program here.
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