All Topics / Finance / Getting Finance for multi-unit development

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  • Profile photo of AALLIIAALLII
    Participant
    @aallii
    Join Date: 2012
    Post Count: 37

    Hi guys,

    I require some information to do with financing and what the best method is and who the best people to deal with are regarding obtaining finance for multi-unit development. Intending to do 5+ units on a block and already some of the major banks have stated this is more a commercial type transaction as such attracts a much higher rate.

    While I'm still comfortable with a commercial type loan, I just want to know some details – i.e. what documentation do I require, types of budgets, business plans? Also does anybody know a good broker who deals with this type of stuff in the melbourne area?

    Our balance sheet is not strong, we dont own much equity, however we have a steady income at approx 2 x 65k p.a. I know we will be required to sign up as guarantors however will banks generally look only as to our circumstances or the profitability of the project? My partner and I are also prepared to contribute upto 160k over the life of the project (4-7k a month) for all activities including subdivision.  Do banks also provide some funding i.e. 120k for overdraft incase certain things come up during the build process, essentially we dont want to go out of pocket half way the project.

    Please let me know if anyone was in a similar situation during your first project and any guidance would be much appreciated.

    I always say, you have to start somewhere, and the project is looking profitable so I'd hate to see a bank turn us down despite the likely profitability of the project simply because of our current finances.

    Thanks :)

    Profile photo of AALLIIAALLII
    Participant
    @aallii
    Join Date: 2012
    Post Count: 37

    Also another matter, do banks generally accept finance structures where payment for total interest is due either 6months later or at the end of the project upon realising the sale of all properties?

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 12,018

    At 5 Units it is more than likely to be considered as a Commercial lend as you have suggested with a maximum lvr of circa 70%.

    Lenders will only lend against current value (assuming you are purchasing an existing block of unit) or a combination of cost  / end value if you are buying land and constructing.

    Either way your own Statement of Position will be important and limit assets will go against you.

    Even assuming you have limited personal debt / no mortgage etc $65K PA x 2 is not much to service such a debt.

    Any loan where interest is to be capitalised will need to have the interest factored into the lvr i.e if interest accounts for say 5% of the project over 6 months the lvr will be reduced by 5%.

    Cheers

    Yours in Finance

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
    Email Me | Phone Me

    0-40 Properties in a decade with a unencumbered portfolio value in excess of $40M. Ask me for a copy of my API Interview.

    Profile photo of Mick CMick C
    Participant
    @shape
    Join Date: 2010
    Post Count: 1,099

    For development of more then 4; your best to stick with commercial anyway;

    – More flexible
    – Easier to deal with + faster + can be tailored to your needs
    – Will take in pre-sales
    – Interest can be cap ( depending on lender)
    – Better valuation

    Remember rate is one of the last thing successful medium- large developers look at as it will only last for 12-1 month depending on your build time…the another factors of how easy it is to obtain finance at the desire LVR, conditions, terms and time is more important hands down!

    After you have built the place; you can refinance to a standard home loan rate for muti unit developments – http://www.shapehomeloans.com.au/finance-for-multiple-units

    Regards
    Michael

    Mick C | Shape Home Loans
    http://www.shapehomeloans.com.au/
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    Same Banks. Better Rates. Served With a Passion.

    Profile photo of Aaron_CAaron_C
    Participant
    @aaron_c
    Join Date: 2012
    Post Count: 65

    As the boys have stated – this IS a commercial loan. In which case your ‘income’ is not so important – the most important thing is can you afford the debt for the project. This may involve using other assets you have (but you have indicated you don’t have much else), or pre-selling the units in order to clear the debt upon completion. Please consult with a broker who can give you some good advice on where to go. Commercial funding for development is definitely more complicated than its residential counterpart so make sure you have all your documentation in order.

    Just bear in mind though (as Richard has indicated) that banks do not like cash-strapped developers – because they know that there is a high chance of you going bust halfway through and leaving them with a half finished site, which is basically one of the worst securities a bank can have.

    Profile photo of AALLIIAALLII
    Participant
    @aallii
    Join Date: 2012
    Post Count: 37

    The property (block of land with a house on it) is being purchased initially as a residential property between the two of us and will be begining the development either a month later or 2. The land was say 500k, and say we develop at a cost of 900k, and final output = say $2m, does this mean we have an LVR of (500+900/2000) 70% or (900/2000) 45%?

    Although we do not have a strong balance sheet, we have a business plan, a detailed cash flow budget spanning into 24 months, budget balance sheet and income statement with various factors in place and uncertainty and risks in place. Despite all these and the fact that majority of the significant costs have been verified via quotes, is this sufficient or highly advantagous to the bank?

    Anybody know of any good development brokers in the Melbourne area?

    Thanks,

    Profile photo of Alistair PerryAlistair Perry
    Participant
    @aperry
    Join Date: 2004
    Post Count: 891

    Hi Aalii,

    Because of your income you would only be able to qualify for a loan with interest capitalisation. It will be more expensive, but you need to out this into the context of the time period of the loan. If interesst cost is a real factor in whether you do the development or not then you probably shouldn't consider it. The most imprtant factors for you are 1. getting a loan 2. getting enough money.
     
    Your options in terms of lenders will also depend on where the proiperty is, as most of the smaller private lender who are willing to fund developments have geographic restrictions.

    Regards
    Alistair

    Profile photo of AALLIIAALLII
    Participant
    @aallii
    Join Date: 2012
    Post Count: 37

    No, to be honest, I'm not concerned about the interest and whether it is capitalised. I actually prefer that as it will ensure I have more funds available incase something came up during the build process requiring funds which the bank will not lend against. The profitability of the project is quite high as such interest capitalisation vs payment each month and differing rates are not a significant deal breaker for me.

    My most important factors as you said are getting the loan and having enough money to fund certain things which come up not entirely expected.

    From what I have been told, banks only fund things which they can place security over, that is i.e. if there is a large rock on the land which is requried to be removed, they generally wont fund this, as such I am required to fund the process of removing it. Is this correct? or LVR funding will generally involve i.e. end project = 2m, therefore I have available 75% = 1,500,000 to fund entire project, even if the build costs only 900k and land was 500k (1.4million), meaning I will have 100k available for unexpected stuff.

    Hope that makes some sense :p

    Profile photo of luke86luke86
    Participant
    @luke86
    Join Date: 2010
    Post Count: 470

    I AALI- I don't understand how you can contribute 4-7k per month on two $65k incomes. Is the $65k after tax?

    Cheers,
    Luke

    Profile photo of AALLIIAALLII
    Participant
    @aallii
    Join Date: 2012
    Post Count: 37
    Qlds007 wrote:
    At 5 Units it is more than likely to be considered as a Commercial lend as you have suggested with a maximum lvr of circa 70%.

    Lenders will only lend against current value (assuming you are purchasing an existing block of unit) or a combination of cost  / end value if you are buying land and constructing.

    Either way your own Statement of Position will be important and limit assets will go against you.

    Even assuming you have limited personal debt / no mortgage etc $65K PA x 2 is not much to service such a debt.

    Any loan where interest is to be capitalised will need to have the interest factored into the lvr i.e if interest accounts for say 5% of the project over 6 months the lvr will be reduced by 5%.

    Cheers

    Yours in Finance

    QLD007, just out of curiosity, what is generally considered to be in a generally good financial position? How much cash/assets does the bank want to see before feeling safe about lending.

    Also, I'm hoping to have altleast 3 or 4 of the properties sold prior to building. If this is done and contracts signed but settlement takes place after build, how advantageous is this from a lenders perspective?

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 12,018

    AALLI you might need 3 or 4 prior to finance approval.

    As to what is considered a good financial position this will depend on a lot of things age,residency history, income, assets v liabilities and a raft of ratios lenders use.

    Alistair (APerry) is based in Melbourne so might be worth giving him a call and seeing if he things it is a doable deal.

    If he says NO then pretty that is your answer.

    Cheers

    Yours in Finance 

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
    Email Me | Phone Me

    0-40 Properties in a decade with a unencumbered portfolio value in excess of $40M. Ask me for a copy of my API Interview.

    Profile photo of Alistair PerryAlistair Perry
    Participant
    @aperry
    Join Date: 2004
    Post Count: 891

    Most lenders look at % of costs and % of end value when considering a maximum loan amount. You can include site costs in the construction loan as long as it can be catered for inside the loan limit. However, you won't get 75% of the end value, more likely somewhere between 65% and 70%. If you acheive presales then you increase the likelihood that you can get a bank to fund your deal, without preslaes you still have options but they are more expensive.

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,190

    Aalli

    Before you buy make sure you get your structure properly sorted out and set up,

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://structuring.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of brendogsbrendogs
    Participant
    @brendogs
    Join Date: 2011
    Post Count: 30

    Terryw,

    You say make sure you get your structure planned out properly. I am about to put an offer on a property in which I’d like to develop in 2 or so years time once I get some of the debt paid down. I am thinking of a 4-5 unit development on the block, what structure would suit it best in your opinion?

    I want to make sure I have this sorted out now so if I do eventually decide to do such a project in that timeframe I’m setup properly.

    Regards Brendon

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,190

    You can't expect an answer to this over the net. Its like saying I have a pain in the chest, what sort of medicine should i use?

    Its extremely complicated. But if you get it wrong it could be costly – although no life threatening.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://structuring.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of AALLIIAALLII
    Participant
    @aallii
    Join Date: 2012
    Post Count: 37

    Although I am not advising you Brendogs, the structure I am using for my project wihch is similar in your work is where I have established a company to be a trustee of a discretionary family trust that will operate the entire project. I am doing this project with family members as such it is safer then to do it with strangers.

    Benefits are that we are protected from legal liability to extend of directors duties are concerned and trustee duties, and we have the flexibility of distributing the profits to other family members to ultimatly reduce our taxation.

    I agree with Terryw, you should seek professional advise, however prior to doing so, do your own research so you understand your options as noone is really responsible for yourself then you.

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,190

    Many things will need to be considered such as:
    – GST
    – CGT/Income tax
    – possibilities of losses
    – whether all or some will be retained
    – personal liability
    – personal guarantees
    – borrowing ability
    – other assets
    – asset protection
    – who the builder is
    – financing
    – land tax
    – stamp duty
    – estate planning and death (what if death mid way thru!)
    – OHS issues
    – parties involved
    – control
    – deposits
    – franking credits
    – family incomes
    – centrelink
    – length of project
    – company loans, Div 7A
    – legalities
    – contracts
    – forgiveness of debts and tax effects etc
    – value of land
    – value of build
    – end value
    – commercial or residential
    etc

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://structuring.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of brendogsbrendogs
    Participant
    @brendogs
    Join Date: 2011
    Post Count: 30

    I totally understand what your saying there Terryw but I should have directed my question to AALLII. Thanks for your response, I have done my research and I do believe that structure to be the best for this particular project as it is for yours. Which accountant did you get to set this up for you? I don’t have much faith in my accountant for anything other than tax returns to be honest.

    Profile photo of AALLIIAALLII
    Participant
    @aallii
    Join Date: 2012
    Post Count: 37
    brendogs wrote:
    I totally understand what your saying there Terryw but I should have directed my question to AALLII. Thanks for your response, I have done my research and I do believe that structure to be the best for this particular project as it is for yours. Which accountant did you get to set this up for you? I don't have much faith in my accountant for anything other than tax returns to be honest.

    I'm actually an accountant myself so I did the setup myself. Company setup is fairly straight forward using the ASIC form, and you can get a fairly generic trust deed setup using cleardocs, by googling.

    Its best you do see an accountant if you are not familiar with these things and you can find them using this forum by reading other posts. Sorry I dont have any good ones who are experts in this field.

    Profile photo of brendogsbrendogs
    Participant
    @brendogs
    Join Date: 2011
    Post Count: 30

    Oh ok that’s fair enough, thanks again. I think I may have been out bidded on this deal, so now it’s down to the mind games with the agent who I do not trust even the slightest! All the best with your development mate!

    Regards Brendon

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