Forums / Getting Technical / Finance / First time development finance

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  • Profile photo of -------——-
    Participant
    @aloha
    Join Date: 2007
    Post Count: 14

    Hi All,

    I am looking to develop a property in Melbourne into three townhouses. (up to 500K for for the site and approx $700K for the development costs). This will be my first development.

    I have %100 of the money in cash for the initial property purchase – but I would be looking to finance the build and then sell the units.

    – Should I put all the money down for the initial property purchase and then finance the build or should I put (lets say) 75% down on the initial property and put the remainder on the build (and finance the rest)?

    – If I buy the house outright will the bank lend me %100 of the build given that the property has no finance on it and I would be selling at the end of the development? 

    – Can I stagger the loan for the build to match my progress payments to minimise my repayments during the build?

    Thank you

    Profile photo of TheFinanceShopTheFinanceShop
    Participant
    @thefinanceshop
    Join Date: 2012
    Post Count: 1,271

    Hi Aloha,

    You can borrow 100% of the construction costs so long as your overall LVR falls under 95%. 

    Have you done developments before? I do and from personal experience I always find the need to have liquid cash due to an unexpected cost. The lender will always lend you the funds in progress payments, i.e. $15k for demolition, then $20k for slab, etc. Some lenders may have LVR restrictions on construction such as ANZ so be careful with that. Do you have the DA already as the lender will require this.

    Regards

    Shahin

    TheFinanceShop | Elite Property Finance
    http://www.elitepropertyfinance.com
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    Residential and Commercial Brokerage

    Profile photo of -------——-
    Participant
    @aloha
    Join Date: 2007
    Post Count: 14

    Hi Shahin,

    Thanks for the information that helps with my planning. No I don't have the DA yet – I'm working through how best to manage the capital I have for the site purchase and plan for the 12 months ahead. I think I'll put 100K aside and only put up the 400K for the initial purchase and go for a long settlement whilst I go through the DA process. Yes it's my first development but I have a project manager on board helping me to get to DA stage.

    Thanks

    Aloha

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 12,010

    Hi Aloha

    Yes you can certainly borrow 100% of the construction price subject to a few variables however i would probably suggest that you borrow say 80% of the initial site price and keep the balance in an offset account initially.

    This will give you flexibility when it comes to the construction.

    Also remember if you knock down the existing property you might have to reduce the loan to a percentage of the land value.

    One thing to make sure is that your Broker finances the deal on the initial property with a lender that will allow you to construct 3 properties on a single title.

    Cheers

    Yours in Finance

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
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    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 TheFinanceShopTheFinanceShop
    Participant
    @thefinanceshop
    Join Date: 2012
    Post Count: 1,271

    Hi Aloha,

    Who is the project manager? Are they a PM or a town planner?

    Make sure you get yourself a good local town planner who knows the area. Also make sure you re-run and verify your numbers a thousand times and factor in fat and spillage. I just finished a development on Sydney's North Shore and we had to excavate only to find sandstone. It cost me $50k that I didn't budget for. In hindsight should have done better DD. 

    From a finance side – keep below 80% as much as you can early on. 

    Regards

    Shahin

    TheFinanceShop | Elite Property Finance
    http://www.elitepropertyfinance.com
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    Residential and Commercial Brokerage

    Profile photo of -------——-
    Participant
    @aloha
    Join Date: 2007
    Post Count: 14

    Hi All,

    Thank you very much for the information – you've been very helpful in clarifying some of my decisions.

    Richard, I'll do exactly that  – I'll be well below 80%. The rest (about 100K) I'll set aside for getting the DA and some more in reserve for the next stages.

    Shahin I have a PM who will oversee the construction phase. He's offered to get me to DA for an additional fee – but I'm exploring coordinating the DA stage myself as I felt his fee was too high. I'm looking at engaging a town planner to coordinate through to DA.

    Thanks,

    Aloha

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 12,010

    Aloha as i mentioned earlier just make sure your lender knows your intentions as too many lenders wont allow multiple properties on the 1 title and that's where so many clients come unstuck.

    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 TheFinanceShopTheFinanceShop
    Participant
    @thefinanceshop
    Join Date: 2012
    Post Count: 1,271

    Ascertaining a DA can be liking pulling teeth depending on the council. You will need a lot of time so it may be worthwhile engaging a professional but make sure that its a townplanner.

    TheFinanceShop | Elite Property Finance
    http://www.elitepropertyfinance.com
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    Residential and Commercial Brokerage

    Profile photo of grimnargrimnar
    Participant
    @grimnar
    Join Date: 2010
    Post Count: 86
    Aloha wrote:

    Richard, I'll do exactly that  – I'll be well below 80%. The rest (about 100K) I'll set aside for getting the DA and some more in reserve for the next stages.

    Hi Aloha,

    Just reading into your statement.  I think what Richard mentioned was borrowing 80% of the land value (400,000), using only a 20% deposit (100,000). Then put the 400,000 into an offset account for this loan.

    In this way, when you need to draw cash to fund DA or other emergent activities you will have the maximum amount of  funds available and can be drawn from your offset without delay or costly application process. In addition, you only pay interest on the smallest possible amount.

    Example:

    land cost: 500,000

    Deposit: 100,000

    Loan amount: 400,000

    Funds available in loan offset: 400,000

    Interest charges here would be nil. Until you draw some funds out. Example:

    Loan amount 400,000

    DA costs: 50,000 (pay for this with funds in offset)

    Funds in offset: 350,000

    Difference: = 400,000-350,000 = 50,000

    Interest will be charged on 50,000 only.

    It seemed like what you are saying above is that you would be putting down 400,000 and only borrowing 100,000…. which is the other way around and doesn't appear to leave you with a lot of wriggle room.

    Sorry if speaking out of school.

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

    Hi Aloha,

    Do you know if you want to do the development under a commercial or residential loan, with three on title you can probably do either. Residential is a little cheaper but there are advantages to using a commercial lender, sometimes you can get more money and there are options such as capitalizing interest, rather than making monthly payments, this is obviously helpful with cashflow, but also means there is no servicing test done by the bank. Have a look a the following youtube video I made a while back, it explains how commercial development loans are assessed.

    http://www.youtube.com/watch?v=rHaH0BdpdeM

    Profile photo of christianbchristianb
    Participant
    @christianb
    Join Date: 2009
    Post Count: 386

    Aloha,

    A few things you may wish to consider:

    • Our clients are finding two dwellings much simpler to finance than three
    • Make sure your structure suits your sales/retention strategy
    • Keep a cash buffer from the start – it's easier to solve problems quickly
    • Include all you can in the build contract – little bits outside the contract amount add up
    • Engage with a team that can guide you as well as do the work
    • Have a plan for the project, then some wriggle room

    It always takes longer and costs more, so try to limit overrun with tight documentation and rigorous planning.

    Best of luck with the project

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

    A few things you may wish to consider:

    • Our clients are finding two dwellings much simpler to finance than three
    • Make sure your structure suits your sales/retention strategy
    • Keep a cash buffer from the start – it's easier to solve problems quickly
    • Include all you can in the build contract – little bits outside the contract amount add up
    • Engage with a team that can guide you as well as do the work
    • Have a plan for the project, then some wriggle room

    It always takes longer and costs more, so try to limit overrun with tight documentation and rigorous planning.

    Best of luck with the project

    Hi Dave,

    Two is easier to fund tan three if you are looking to use a residential lender. The number is irrelevant when it comes to commercial development finance. If they are going direct through a bank it is possible that the person they are dealing with is not even aware of this, particularly if they are in the private banking section of that bank, this is the absolute worst place for a property developers relationship to be, in any bank.

    Profile photo of BallerinaBallerina
    Participant
    @ballerina
    Join Date: 2011
    Post Count: 63

    Hi Aloha

    We have just recently completed similar development in Brisbane. Does your TDC of $700 include Council contributions? They are very expensive here in Brisbane, for 3 townhouses we are talking some $70K. Ask your town planner about it! And choose your building designer/architect based on their design skills also, not the price only.

    Good luck and have fun!

    Ballerina | Soprano Developments Pty Ltd
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    Building Design & Property Development Services

    Profile photo of PrimePropertyInvestorPrimePropertyInvestor
    Member
    @primepropertyinvestor
    Join Date: 2012
    Post Count: 48

    Hi Aloha,

    It seems a great plan about your development project and I would agree with Ballerina that with these type of projects you want to stay focused on quality of work, but still stay in control of your budget. 

    Good due diligence skills is something very important at this stage. When you will be 100% confident about your project – finances in come in place. 

    All the best for you and keep us posted how are you doing.

    Profile photo of -------——-
    Participant
    @aloha
    Join Date: 2007
    Post Count: 14

    Hi All,

    Thank you all for the great advice – it's been of immense help in pointing me towards the right areas of research and clarification of strategy.

    I'll be engaging with a town planner and project manger without question – my biggest concern is ensuring the construction costs don't blow out – I want that contract to be as tight as possible. I feel that's the area where the most could go wrong and the area I'm least confident about. I've got great lawyer who has helped me in the past with other property deals (including a win against the State Gov regarding stamp duty :D) so i'll be running everything past him as well.

    Ballerina, no – but 70K sounds a lot more than I had thought. I'll make those calls and report back – I'm assuming it varies from council to council? 

    Primeproperty – thanks for the advice – i couldn't agree more. I will definitely keep you all posted.

    Profile photo of TheFinanceShopTheFinanceShop
    Participant
    @thefinanceshop
    Join Date: 2012
    Post Count: 1,271

    Hi Ballerina,

    $70k is a huge amount. Did the council give an explanation? The councils usually work off a schedule. 

    Regards

    Shahin

    TheFinanceShop | Elite Property Finance
    http://www.elitepropertyfinance.com
    Email Me | Phone Me

    Residential and Commercial Brokerage

    Profile photo of BallerinaBallerina
    Participant
    @ballerina
    Join Date: 2011
    Post Count: 63

    Hi Shahin

    We have actually paid less, because our DA was approved before 2011 and we were given  a discount. After that, Brisbane City Council has removed all discounts and for DAs approved in 2011 full amount is payable. In 2011 it was $26k/three bedroom dwelling ($18K for two bedroom). I haven't checked fees for 2012/13.

    We are currently looking for the next project, and infrastructure contributions make feasibility very hard to work.

    And yes, Aloha, it  varies from council to council. Brisbane council had a floods to deal with, and is in need of many $$$!

    Most councils have fees published on their websites.

    Ballerina | Soprano Developments Pty Ltd
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    Building Design & Property Development Services

    Profile photo of BallerinaBallerina
    Participant
    @ballerina
    Join Date: 2011
    Post Count: 63

    Hi Shahin

    We have actually paid less, because our DA was approved before 2011 and we were given  a discount. After that, Brisbane City Council has removed all discounts and for DAs approved in 2011 full amount is payable. In 2011 it was $26k/three bedroom dwelling ($18K for two bedroom). I haven't checked fees for 2012/13.

    We are currently looking for the next project, and infrastructure contributions make feasibility very hard to work.

    And yes, Aloha, it  varies from council to council. Brisbane council had a floods to deal with, and is in need of many $$$!

    Most councils have fees published on their websites.

    Ballerina

    Ballerina | Soprano Developments Pty Ltd
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    Building Design & Property Development Services

    Profile photo of mbuildingmbuilding
    Participant
    @mbuilding
    Join Date: 2012
    Post Count: 28

    Ballerina,

    Councils in Sydney work on per/sq meter construction cost. is it same for BCC.

    $26K for 3 bedroom dwelling seems really really high.

    Let;s say medim finished 3-4 bed/2 bath/ house cost $230K (turn key) . that is roughly 10% of total build.

    For $475K construction cost, we paid around $1200 DA fee in one of the Sydney  area council + $2000 (rough estimate cost)

    Profile photo of BallerinaBallerina
    Participant
    @ballerina
    Join Date: 2011
    Post Count: 63

    I can sense some disbelief and rightly so! I  don't know how to attach PDF to this comment (silly me!) to show you council's fees.

    It is nice to hear that developments in other councils are easier to finance.

    You can always visit Brisbane Council's website-its there.

    Ballerina

    Ballerina | Soprano Developments Pty Ltd
    Email Me | Phone Me

    Building Design & Property Development Services

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