The lenders will release funds to the builder in about 3 or 4 stages as building progresses (eg slab down, lock up stage etc). They will need to send a valuer out to check the work has been completed etc. So there is usually another few hundred dollars in fees associated with construction loans.

To approve the construction loan they will generally need a fixed price building contract with a registered builder. There are a few lenders that will lend to owner builders and they require detaile cotsings of materials used etc. (I can send you a spreadsheet from one of the lenders if you like). They give this to their valuer who assesses the value and estimates the value on completion.

The lender doesn't really need a accurate timetable of construction. You just ring or fax them when the relevant stage has been reached and they order the valuer. The inspection is done and money released a few days later.

The end result will be the same overall, in terms of interest, but may be different from a tax POV. You would have access to spare cash via the LOC if needed – but I guess that if you needed cash for personal reasons it wouldn't be good to start using a LOC which you have used for investment up to that point. So option 3 may be better.

It would depend how you structure it.

If you cross collateralise your existing properties, then your current loan would not increase. You would use these as additional security for the next one. So the next one you would have a loan that may be 105% of the value of the new property. $70,000 of this is supported by the exisitng properties.

Another way, more preferable generally, is to borrow this $70,000 and to use the cash for the new property. So your exixisting loan would stay the same, but you would have another split for $70,000. Since you have used this for investment purposes the interest on this split should be deductible.

Note, this would be borrowing 100% of your existing properties and would be hard to do, you may need to wait for a bit more equity to build up.

Just think of the parents as a 'bank'. They are just lending you money with you making repayments to them the same as you would be if you borrowed the money from a bank.

As a very rough guide, you could borrow around $300,000 – maybe a bit more depreciation you are claiming on your current properties.

It is generally best to pay down non deductible debt first, so I would go for option 2.

Tugger

How much would it cost to build on them? They could get a pre-approval for a building loan, go get plans drawn up and find a builder etc. They should be able to borrow about 80% of the value of the land and the construction cost and this should be plenty. They would only need to pay interest on the amounts as they are drawn down.

You may not have much equity to make it worthwhile as you can generally only borrow up to 90% of the value of the propeprty. And if you go over 80%, there would be LMI involved.

Peter

Have a look at the latest Bantacs newsletter, http://www.bantacs.com.au/newsflash/current_issue.pdf
there is bit on "building a duplex with a friend"

You might want to do a Dip and Financial Planning so you meet ASIC's PS 146 requirements for giving financial advice.