HI,
I am looking to make a start in property development . At the moment I am in the process of paying off my house and dont have a lot of disposable cash left over.
My question is, how would someone like myself be able to service the loan on a property development ?. Is the only option a private investor ?. If so, where would the best place be to find one ?.
ThanksThe finance requirements of a proeprty development are much stricter than those for a normal buy and hold investment.
Most lenders will reuire you to put at least 20% of the capital up first.
This article will help you understand the different requirements for development finance…
http://www.propertyupdate.com.au/articles/15/1/Understanding-Development-Finance
Michael Yardney
METROPOLE PROPERTIES
Publisher of Australia’s leading property e-magazine.
Join over 20,000 readers.
FREE subscription http://www.PropertyUpdate.com.auHi Peter
Whilst i agree with Michael that the criteia is a little stricter that your normal residential home loan it all depends on how small you are going to start.
If you are looking at a building a duplex or similar or buying a house, subdividing and building another on the subdivided block then all this is possible with little deposit funds.
If however you intend to kick off with a 12 x 3 townhouse project then you will need a lot more capital and probably 3/4 pre-sales just to start with.
It is not an easy question to answer without more information but is certainly doable so dont give up.
If you want to post more information either openly or through a PM then I can look at your position and advise accordingly.
Cheers
Richard Taylor
Residential & Commercial Finance Broker.
Licensed Financial Planner. Ph: 07 3720 1888
[email protected]
Looking for life cover – We Guarantee to beat any quote you have in writing.Richard Taylor | Australia's leading private lender
Hi Peter,
Here’s an extract of a document off our website about Property Development :
What is Property Development?
There are two major categories of Property Development
Land development
Building developmentWhat does a Developer do?
A Developer will typically acquire raw land and apply to subdivide it into smaller lots. The Developer will also improve the land by adding value through infrastructure, such as roads and a sewer.Once the subdivision has been approved and the infrastructure is in place, the land can be sold off individually or in bulk for “house and land packagesâ€, usually at a significant profit. Alternatively, the Developer can keep the land and construct dwellings on it. The finished buildings can then be sold and the profits may be used to fund the next project. Some Developers choose to hold onto some or all of the properties and keep them as investments for rental properties.
In addition to domestic developers, there are developers who specialise in other areas, for example, commercial property or retirement housing.
Essential requirements of a successful Developer
Successful developers rely on good, careful, accurate planning at all stages of development. They recognise that “time is money†and depend on a good “team†of contractors to complete each stage of the development process.
Without a reliable team, specific tasks can run way over time and disrupt the whole schedule, which in turn eats into those vital profits. Developing can therefore be a highly stressful experience.In addition to good tradesmen, developers also need the services of expert professionals to ensure the smooth running of projects. Services you may need to call upon include a Town Planner, Engineer, Architect, Surveyor and Solicitor.
Property Development is a bit like baking a cake. All the ingredients must be available, assembled and skilfully combined to get the perfect – or this case the most successful and profitable – outcome.
To maximise profits, developers should buy real estate at “wholesale†prices, as opposed to paying retail. Developers recognise that a large portion of profits are made through buying at the right price and not just through developing alone. This requires good negotiating skills and a firm resolve to walk away when the asking price is too high – without getting emotionally involved.
Downsides of Property Development
The majority of building developments require considerable sums of money and carry a certain degree of financial risk. Downturns in the property market can result in lower than expected land and property values, which may also take far longer to sell than initially expected. Holding property for long periods means increased interest and other costs, which can blow out if interest rates also rise.As well as these risks, there are also the day-to-day pressures and frustrations involved with developing, such as unreliable tradespeople or professionals, bad weather or delays in the Council process and other “red tapeâ€.
Although many developers are extremely successful in what they do, and earn a good living, it is important to realise that their job is far from easy.Basic Step-by-Step Process
1. Decide on the type of development (eg house, duplex, townhouse, apartment, retirement property, student accommodation etc)
2. Conduct a preliminary Feasibility Study
3. Find and acquire land
4. Plan the development and estimate costs
5. Approach financier for funding, if required
6. Apply for approvals
7. Build infrastructure
8. Sell land if that is the intention or develop further
9. Prepare technical design and drawings
10. Work on marketing campaign
11. Obtain quotes and building contracts
12. Commence construction and manage the process
13. Obtain necessary certification and approvals
14. Complete the settlement of properties sold and/or manage tenants.What should I look for when selecting a development site?
For further information regarding land features, read our article on Subdividing which covers issues to consider when sourcing a block of land to be used for development.A couple of good books to read are:
Australian Residential Property Development
By Ron FORLEE
Publisher Wright Books, 2004
Smarter Property Improvement
By Peter CEREXHE
Publisher Allen & Unwin, 2004
Our website has further reading on subdividing land which may be of interest to you also.Best wishes,
AmandaBS
http://www.propertydivas.com.au
FREE online Property Resources“It is better to be inconspicuously wealthy, than to be ostentatiously poor…”
Hi Peter,
The financing for larger projects sound pretty scary, but really its not if the project is good i.e. high profit margins. If you go in on a low profit margin eg 15% you will have trouble, unless you have very high presales or can service the end debt. If the margins are strong, 30% plus then its not that difficult.
As a rule you can lend 80% of total project costs from a prime lender (if you’ve owned the property for a while they’ll allow you to include capital growth but they like you to have cash in the project), you can take this to 90% if you use mezzanine finance, so eg you can do a $5 million project with $500,000. The funder(s)will capitalise the interest so such projects are not a drain on cashflow .
Presales requirements depend on a mixture of your personal capacity, the margins in the project and the expected time frame required to sell the finished product (this will be addressed in the valuation). There are some lenders around who will fund projects with no presales, but generally they would have to be in an established area where they can make a fairly accurate estimate of the likely time it will take to sell the end products.
I’d be happy to send you an excel template with sample figures to show you how a commercial development loan is assessed if you are interested.
I suggest you have a good look through the articles on the Metropole site also, its an excellent resource.
Regards
Alistair
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