How Land Owners Finance Development of Real Estate Properties

With an influx of development of real estate properties especially for commercial purposes, land owners have had to find ways of getting financing for their projects. Highlighted below are the three most common ways of property financing models.

Oct 27, 2020 - 07:36

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How Land Owners Finance Development of Real Estate Properties

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1. Pooling of resources by individual investors

The pooling of resources is usually done by individual investors with common investment goals mainly in real estate. The resource pooling create greater purchasing power thus more diverse and rewarding investment opportunities through simple economy of scale. By pooling resources with other investors we are all able to achieve something greater than what we could achieve on our own.

The group through either formal or informal partnership agreements will contribute the required funds for the project which include purchase of land and development of the property

Depending on the project, most of these groups have a 3- 8 year life cycle.The cycle is often repeated if the project was successful and a bind has developed among the members of the group.

2. Securing financing from commercial banks

Typically the land owner or developer approaches the bank with details of the project to be financed. The bank will go through the project details comprising of the project location, development cost, and target market to determine the commercial viability of the project. This is the most common method especially for real estate developers because its systematic with well laid guidelines with continuous improvement as the real estate sector in Kenya develops. The major hindrance to financing of property development by banks has been high interest rates but with the capping of interest rates the surge for this method is expected to grow.

3. Joint ventures with capital investors

The capital investors are usually individuals or firms with funds and always looking for project with good returns for their money. With real estate in Kenya having some of the highest returns, this method of financing is quickly gaining traction. The land owner and the capital investors usually form a company specifically for the project with agreed terms on how the profits from the project will be shared. The firm owner transfer the land to the project company while the investors provide funds for the construction of the projects