capitalising interest for a small development - would you?

Aaron Sice

Aaron Sice

have the ability to take on a small development whereby the block has the original house positioned in such a way that we can subdvidie off the rear and renovate the front house, selling it for approx what we paid for the entire orginal lot.

the rear lot would owe anything from $0 to $50k after all is said and done.

good news is, the rear lot will support 4x apts. the final values are such that you could essentially get "2 for 1", in that we would have 4 apts for the price of 2, the 'price' being construction cost, because the land is almost free all going well.

question is, with such a good deal, i believe i know of one bank that will allow capitalised interest as long as the final project end val is 65% LVR or less, and a low 8's interest rate to carry it through because its a comm loan.

i honestly believe we can go from form 1A to tenants in 24 months. the entire finished project would also be CF+ the the tune of 10%.

so, would you capitalise the interest in this situation? if so, why? if not, why not?

cheers.
 
Aaron Sice said:
have the ability to take on a small development whereby the block has the original house positioned in such a way that we can subdvidie off the rear and renovate the front house, selling it for approx what we paid for the entire orginal lot.

the rear lot would owe anything from $0 to $50k after all is said and done.

good news is, the rear lot will support 4x apts. the final values are such that you could essentially get "2 for 1", in that we would have 4 apts for the price of 2, the 'price' being construction cost, because the land is almost free all going well.

question is, with such a good deal, i believe i know of one bank that will allow capitalised interest as long as the final project end val is 65% LVR or less, and a low 8's interest rate to carry it through because its a comm loan.

so, would you capitalise the interest in this situation? if so, why? if not, why not?

cheers.
Click to expand...

i would for sure, not even a consideration for me to make any payments, keep ur cash for when u need it
 
A development deal that is profitable should have interest capitalised for sure. And if capitalising interest kills the deal, then it's a pretty crap deal in the first place :)
 
Capatalising interest in your situation seems fine to me. It is rare dev deal that doesn't have 12 months capatalised interest factored into the loan amount required.
 
I'm of the opposite opinion. Why capitalise interest if you have the cash/cash flow and have no other use for it?
 
evand said:
Why capitalise interest if you have the cash/cash flow and have no other use for it?
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I agree with you, coz thats just burning cash....... but is it the case here that there is no other use for the funds...........and with a 24 mth completion window, from a risk management POV, who knows what needs or opportunities may come up ?

ta
rolf
 
kinda my train of thought too, rolf. 2 years couild bring up a lot of other opportuity.

but FWIW, i do agree with evans POV, which is the way i lean generally. dont borrow if you dont need to.

but the deal is a cracker, and theres another one like it we can take advantage of, too.
 
Evan I'm not sure if you understand but in property development access to cash is paramount. If the bank is willing to let you capitalise interest, even if you personally have strong cashflow, then it's always best to go ahead. There's always big expenses that pop up here and there and to strip out your fat because you want to save a few pennies on capitalised interest is bad business practice.
 
Aaron Sice said:
kinda my train of thought too, rolf. 2 years couild bring up a lot of other opportuity.

but FWIW, i do agree with evans POV, which is the way i lean generally. dont borrow if you dont need to.

but the deal is a cracker, and theres another one like it we can take advantage of, too.
Click to expand...

better to just put the spare cash into ur offset home, save interest there, keep the cash for whatever comes up in the future

paying the interest does not make a deal better, just like putting in a bigger deposit does not make an IP a better return, they have have to stand up on there own as if 100% financed
 
Bigtone said:
paying the interest does not make a deal better, just like putting in a bigger deposit does not make an IP a better return, they have have to stand up on there own as if 100% financed
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ah....yes, so true, you generally still have to finance the deposit somehow.

good points folks. i think i'll take advantage of it.
 
I understand. I have done some (minor) development previously. I just think why borrow when you don't have to.if he doesn't capitalize, doesn't mean hes flat broke. And if other opportunities arise, big deal, let's not get ahead of ourselves.cross that bridge.........

Aaron_C said:
Evan I'm not sure if you understand but in property development access to cash is paramount. If the bank is willing to let you capitalise interest, even if you personally have strong cashflow, then it's always best to go ahead. There's always big expenses that pop up here and there and to strip out your fat because you want to save a few pennies on capitalised interest is bad business practice.
Click to expand...
 
evand said:
I understand. I have done some (minor) development previously. I just think why borrow when you don't have to.if he doesn't capitalize, doesn't mean hes flat broke. And if other opportunities arise, big deal, let's not get ahead of ourselves.cross that bridge.........
Click to expand...

i understand what your meaning is, evan - and i do agree. i've always been one for using cash and not relying on lending.

i guess i should explain why i ask. i used cash to fund a large portion of my PPOR, including all the major finishes so i could borrow as little as possible. i also paid for all the price rises and variations myself - all up about $60k worth plus the $300k deposit of which there was about $120k in there more than there should have been - yes, that's a lot of cash. i was under the advice that "she'll be right, you can pull some out later". well, lo-doc rules changed and i was stuck without any backup through the harder times.

what that did, was ruin me from 2008 until now, insofar as cashflow goes - thanks to those hillbillies in backwater Kentucky deciding they didn't want to pay their mortgage anymore. only NOW am i starting to get back above the line, out of the red and into the black.

i'm very, very hesitant to end up in that position again, regardless of whether i'm able to afford it or not.

in my opinion, if a deal stacks up on it's own merit, then it should be funded on it's own merit - however, while i would prefer that funding to be cash, i think i'm going to have to borrow for this one.
 
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