I am interested in developing a 1000m2 block of land with the intention of subdividing and building 3 units.
I have done the math and worked out that it should be a reasonably risk-free investment. Once the units are built I plan on selling one to pay down the loan and keeping the remaining two to rent out, which I have worked out will be CF+ after tax.
My dilemma is that while I have enough equity in another IP to cover the 20% deposit for the land, I do not have enough to cover the 20% for the construction of the units. The bank has advised me that they will loan me the money to construct the units no matter what (i.e. LMI), but I would prefer to come up with a way to cover the 20% in order to increase my profits and reduce my risk.
My thoughts were that I could subdivide the land first and then get the bank to re-value the subdivided land, which will hopefully then provide enough equity to cover (or come close to covering) a large portion of the 20% deposit (going off the prices of other subdivided land in the area). Then I can draw on other resources to make up the remainder (i.e. cash, or equity in other IP).
I was involved in another 4 unit development (JV) 5 years ago where the bank valued the development much higher than the building costs and therefore loaned 100% of the construction costs, so I was not required to provide a deposit.
I would prefer to put in as little of my own cash as possible. What do other investors do in this situation in order to cover the 20% deposit on a development of this kind without having the up front capital to cover the deposit?
I am interested in developing a 1000m2 block of land with the intention of subdividing and building 3 units.
Do you mean 3 units or 3 houses on separate titles? If the answer is 3 houses, can you not just build one at a time and thus reduce your borrowing.
If you mean 3 units then I am confused as to why you would not fit more on 1000m2 (assuming GFA rate is 50%). Why not 5 units. This would greatly increase the bottom line, even though the build cost would increase.
Jon
Hi t803815,
Do you have any equity in other property? If so, you could possibly draw on this. Also, what is the shortfall for the 20% of construction costs? If it is not too much, a good option might be to take out an unsecured overdraft for the project. If the shortfall is signficant and you are able to get a loan for the construction costs, this might be the best option as you need to take into consideration that raising money from an investor will involve giving up equity and will therefore probably cost a lot more than paying LMI.
Kind Regards,
Cameron Perry
Director
Perry Financial Strategies
Level 13, 30 Collins St
Melbourne VIC 3000
Ph (03) 9662 1999
Fax (03) 962 2044
http://www.perryfinance.comHi Jon,
You have a good point, but unfortunately there is a poorly positioned easement that extends across the block and down one side, limiting the number of possible dwellings that can be developed on the land.
With reference to the question of whether I mean 3 units or 3 houses on separate titles.
I mean 3 X 2 bedroom units. I'm not sure that my definition of unit is the same as yours because it would be difficult to squeeze 5 units onto a 1000m2 block, and still be in compliance with the regions planning schemes.
Also, I merely made the suggestion of subdividing as a possible way to come up with the capital for the deposit. Unfortunately, this option will add to the construction time frame and as a consequence increase the risk and reduce the potential profit margin.
I have taken your suggestion on board although, I was hoping for some other creative idea's as possible ways to come up with the 20% deposit without having to provide the cash.
I have heard other property developers on this forum mention that they can borrow up to 80% of the retail value of the development, effectively allowing them to borrow 100% of the construction costs. Is this correct?
What do other property developers on this forum do?
Hi Cameron,
I do have equity in other IPs, but some of this would be used on purchasing the land, and the remainder would not be sufficient to cover the 20% of the development.
I believe the shortfall will be between $20,000-30,000.
Arranging an overdraft of $15,000 wouldn't be a problem, which could then be increased to $30,000 after 3-4 months. This could be one solution for you, but you may need to do the primary loan as a development loan (rather than residential construction) if you can't demonstrate the full funds to complete up front. Otherwise as you indicated in the previous post you may be able to get a development loan against the end value of the project rather than the costs and this may be enough to cover 100% of the construction costs, however you would need to factor in higher costs for this type of facility.
Kind Regards,
Cameron Perry
Director
Perry Financial Strategies
Level 13, 30 Collins St
Melbourne VIC 3000
Ph (03) 9662 1999
Fax (03) 9662 2044
http://www.perryfinance.comunfortunately there is a poorly positioned easement that extends across the block and down one side, limiting the number of possible dwellings that can be developed on the land.
What sort of easements are they? Can they be moved? In some cases drainage and sewerage easements can be built over provided that you bridge them.
I mean 3 X 2 bedroom units. I'm not sure that my definition of unit is the same as yours because it would be difficult to squeeze 5 units onto a 1000m2 block, and still be in compliance with the regions planning schemes.
I am not sure of your location, however most councils will allow a 50% GFA content and as you have 1000m2 that would equal 500m2. The average 2 bedroom unit is 80m2 so you can fit 6 on your property. The unit block would be 2 story.
I suggest that you talk to a local Architect.
Jon
Jon, I appreciate your feedback!
It is a sewerage easement. I will contact the local water authority today for advice on whether the easement can be moved or bridged as you suggested.
I will also speak with a local architect for further advice once I have answers to the above question.
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