Getting finance right for your property development

Property development: scary, a piece of cake, or somewhere in between? Your response will probably depend on whether you are a first-timer, a second-timer, a veteran, or, very importantly, building to make a profit or to live in the property for five-plus years.

It also depends on how much you know about the process. Of course, if you do have experience in property development, then your response will also be based on whether that experience was painless or painful.

There are several considerations when it comes to getting finance and it will impact on what you can borrow. Let’s take a look;

Ultimately, for finance, the lender will require council approved plans and specifications, along with the all quotes for every stage of the build. You must make an allowance for every single thing; i.e. from roof and slab and walls right down to paint, taps, electrical, and lights switches, etc, there typically isn’t a fixed price building contract.

When you are an owner builder, so it’s incumbent on you to provide so much more information to a lender.

If you are an owner builder, most lenders do not like you. There are very few residential lenders that will consider owner builders and the risk associated with owner builders.

The loans they can consider providing to owner builders range from 80 per cent Loan to value ratio (LVR) on just the land value, and you must fund the build, to 50 per cent LVR on land and all quotes (build cost), combined, to 80 per cent LVR on both land and build cost if you are a registered builder.

For example, if your land and all quotes, amounts to $1 million, a lender may consider $800k as a best case, and only if you are a registered builder. If you run out of money, the lenders attitude is ‘too bad’ you should have budgeted better.

Often owner builders’ risk over capitalising, exceeding their budget, get the property to anywhere from slab to lock up stage, then ask for funding to complete the build.

This should be avoided, most lenders simply will not touch you if you were, in their eyes, foolish enough to start building prior to applying for finance, or just as bad, you thought you would finish the project without the need for finance, only to realise the changes you made along the way, led to cost overruns, and you running out of money.

If an owner builder does run out of money, it is better to have made it to at least ‘lock up’ stage, even then it can be difficult to obtain private lending.

Private lending refers to a loan, not through a financial institution but rather a private institution, at considerably higher interest rates, with 6 months or a 12-month loan term.

Just remember, first determine your strategy, whether it is to live in the property, build to keep it or build to flip it, get your budget down on paper, and understand all the costs associated with the development before seeking finance.

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This article via Smart Property Investment does not constitute advice; readers should seek independent and personalised counsel from a trusted adviser that specialises in property, a tax accountant and property design specialist.