In theory, subdividing a property is a magic charm for your wallet; chop up the land, develop the parcels, and sell or use them for residential (or up-zone for commercial) use, and watch the profits roll in. Subdivision loans can help you get a head start on that. The following are three of the biggest benefits to utilizing acquisition and development loans to finance a subdivision investment.
1. Cheaper upfront costs
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Subdivided estates are generally more cost effective for buyers looking to invest in well-to-do suburban areas or located close to (or in) upswinging business and metropolitan centers. For homeowners, less land usually equates to less expensive upkeep and lower maintenance overall, while a reduced home size can be easier to manage—particularly in geographic locations with extreme weather.
The subdivision process makes this option even more affordable for builders. Colorado Federal Savings Bank (CFSB) offers a 5% interest rate on its subdivision loans—a compelling incentive for developers and owners considering dividing their land. Choosing the right lender can also help cut additional initial costs. Banks like CFSB allow builders to pay for half of the points at closing, while the other half can be paid at loan payoff.
2. Loan security
Often, a subdivision loan is obtained through the land itself or any buildings already there. Nevertheless, builders can use properties in development or planned for development within the subdivided land as security against the loan.
Lenders and banks differ on how much of the cost they’re willing to front. CFSB, for one, finances as much as 80% of the total costs—a significant advantage for potential developers who have a profitable plan for the property but currently lack the capital. Subdivision loans differ from lender to lender. Ultimately, the best method to determine the appropriate method of financing your property is to speak with a financial expert—and be sure to disclose all potential development plans to the lender when seeking a closing.
3. Minimized Risk By Developing On Or Near Established Communities
Real estate prices across the US are only rising, and capitalizing on "tried-and-tested" land can be a surefire way to maximize profit while minimizing risk. Developers typically build on or near an already established, master planned community. This means the builder is implementing and adding value to an existing district, rather than constructing a new market based on spec builds. Creating density close to or within a neighborhood proven to sustain growth ultimately equates to less risk for the builder—and the lender.
To learn more about Bisnow partner Colorado Federal Savings Bank click here.
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