property cashflow

Property Financing: Maintaining a Healthy Cashflow

Property Finance

Poor cash flow management is one of the top reasons property development businesses fold. Most projects take between 12 and 18 months to complete and during this time, money is flowing one way only — out. So until you sell or rent out your new build, it will not make any money.

You may have cash flowing in from other sources if you’re an established developer or entrepreneur with multiple developments and income streams. But whether you’re a startup or an experienced developer, dealing with high-cost projects that complete at different times can make effective property financing a major headache. Most businesses have a steady flow of cash coming in and cash going out, so balancing the books is relatively easy. This is rarely the case for property developers who may have months with money going out and nothing coming in.

So how can you put systems in place to give yourself the best chance of maintaining a healthy cash flow in your property development business this year?

  • Crunch the Numbers

You may not consider yourself a financial whizz, but to ensure long term success as a developer, you must get to grips with your budget. If you struggle with financial planning, it’s definitely worth enlisting the services of a professional financial planner or property accountant. Inaccurate cash flow projections and slapdash business planning will almost certainly result in financial difficulties and negatively impact the project’s profitability.

When you initially scope the project — whether you need to seek out funding or are self-financing — create a detailed business plan and include all your projected costs and overheads. They might include:

  • Upfront fees for paying professionals and covering pre-construction costs
  • Monthly running costs, e.g. renting office space, salaries and contractor fees, utility bills
  • Equipment hire
  • Materials
  • A contingency fund to cover unexpected expenses.

Then establish a realistic budget — how much do you have to spend? This may be a combination of self-funding and financing. When will these funds be available? When will sales start to generate an income?

It’s standard practice to forecast cash flow for the next three years to ensure things run smoothly and there are no periods of shortfall where costs outstrip your financial resources.

  • Borrow Money in the Most Cost-Effective Way

Most developers rely on property finance to some extent, no matter how established they are. Becoming savvy about how to reduce the cost of borrowing is an excellent way to maintain a healthy cash flow. 

Using other people’s money to finance your projects is the most capital-efficient approach to property development. But when you choose to borrow can make a significant difference to the cost of doing so. A lender will deem your project high risk at the start of a development, so this is the most expensive time to borrow. As a project progresses, the risk diminishes. If you can afford to delay taking out property financing until further along the project timeline, you can save a lot of money.

Timing your financing and your projects efficiently may allow you to run multiple projects simultaneously, which is a much more cost-efficient way to operate than completing one project at a time. By borrowing money at an affordable point in the project timeline on project one, you can release your capital and use this to fund project two. Reducing the time between projects will mean shorter periods when money flows out of the business and nothing is coming in. 

  • Monitor Your Overheads 

It’s easy to let overheads such as contractor fees and employee salaries spiral out of control — especially if you find yourself up against a tight deadline and need all hands on deck. This is where a solid plan and budget come into play. You can’t plan for every eventuality, but setting a realistic schedule and having a solid understanding of project costs will reduce the chances of you needing to enlist extra, last-minute help.

It’s also worth considering contracting professionals per project rather than hiring full-time employees. This not only gives you a clear per-project cost but also ensures you’re not stuck paying salaries between developments when there may be no work to do. 

  • Develop a Secondary Source of Income

If you’re totally reliant on your next development for your income, maintaining a healthy cash flow can be a challenge — especially if you’re just starting out, have limited capital to fall back on or running multiple projects simultaneously is not an option for you.

Developing a secondary income stream that is completely separate and doesn’t rely on your property projects will allow you to maintain a healthy cash flow during periods when your primary business is not generating sales. A passive or semi-passive income that requires minimal input is the ideal option. But any business that keeps cash flowing between development projects or until you close a sale will provide an invaluable safety net that can help to keep your development projects afloat. 

This is not an exhaustive list and there are many more ways to keep on top of your finances as a developer to set yourself up for project success. The best way to maintain a healthy cash flow is to do your research, plan well ahead and be prepared to enlist the help of a property finance professional to make sure the numbers add up before you make any commitments.