If you are pondering on a real estate development project, you might already be planning to take up a long-term mortgage financing loan. But before you do, stop and think. Your hotel real estate development project doesn’t need funding from a mortgage loan, but from a development loan. Really, mortgage is great for building renovation or land acquisition projects, but not for development projects.
You must understand the difference between a new development project to be constructed and an existing one to be refurbished. Then too, you must understand the difference between mortgage financing and real estate development financing. You might wonder about the importance of telling the difference between two seemingly the same things. Perhaps you have been interchanging the two terms all your life. Or perhaps, you never thought that development project is an entirely different thing from a renovation project. Well, you are about to find out some interesting details.
When you want to buy and own a land or building for the long-term, what you need is a long-term mortgage to finance your plan. Mortgage is great for buying land, apartment, house and whatever property you want to own for many years to come. However, when you want to set out for hotel real estate development, which involves buying a land and constructing structures on it, you need real estate development financing.
With the funds from the development loan, you can then complete the project, sold it and pay back the loan. That’s not a very long time really. It could be more than a year, but eventually you will have to let go of the project and give up “ownership”. If you want to retain co-ownership, that’s the time you apply for a mortgage loan to buy part of the project and own it long-term.
The development project should generate a substantial profit. Ideally, you should have it realized in the form of equity, not cash, to stave off hefty taxations. However, the success of this tactic depends on taxation laws governing your locality. You should also maintain your mortgage loan at a manageable level; keep it at minimum and make regular repayments. That’s the only way to make sure you retain ownership of the project you so dearly labored for.
It’s imperative that you already gained a good grasp of what is renovation and what is development. In particular, you must know that long-term mortgage funding isn’t the way to go if you plan to embark on real estate development. We hope you’re no longer in a state of shock or surprise. These things should be easy to digest for you.
With real estate development financing, you are not merely asking a financial institution to provide you funds for purchasing any property. You are asking them to help you fund a whole project of buying land and constructing infrastructure. To get approval for the development project loan, you need to have your development plans, costing, and feasibility study approved.
Many real estate developers make the mistake of finding and purchasing land first, and applying for mortgage financing later for the building construction. Sadly, they are likely to end up compelled to cancel the mortgage and acquire the right funds for a hotel real estate development or whatever development project they are planning to do. In the process, they waste precious time and money.
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