Another Funding Alternative for Hotel Real Estate Development
As a real estate developer or investor, you’re probably very familiar with long-term mortgage financing. Perhaps, you’ve been funding your real estate projects with it. But truth be told, mortgage financing is actually applied to renovation projects, not development projects, such as hotel real estate development or resort real estate development.
Perhaps you’re wondering why this were so. Well, we are about to reveal some interesting secrets about two different things. A development project and a renovation project are two different creatures. On the same note, the funding for each type of project is not the same. One needs a development loan and the other — a mortgage loan works just fine. It’s understandable that you will be a bit surprised, confused or shocked. To set your course right the next time around, you need to understand and embrace these revelations.
With a mortgage financing, you are acquiring a property for the long-term, say 15 to 30 years. The property here can be a parcel of land, an apartment unit, or a residential building, which you intend to use, lease or sell in the future. With real estate development financing, you are getting funds for a development project, which comprises two parts: land and building plans.
Take for instance a hotel development project. Once the development project is completed, the aim is to sell all of it and use the proceeds to repay the loan. Now, if you want to retain ownership of certain parts of the hotel real estate development project, your option is to pay in full the development loan and then get a mortgage loan for the part you want to own 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.
Know that when you apply for development financing or development loan, you are not trying to get money simply to buy a piece of land or remodel an apartment building. The truth is that you are trying to get funding for both land acquisition and building construction. With that, you need approval for several documents such as development plans, costing, and feasibility report.
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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