Development Finance for 4 Townhouses

[AdamW]

Hi,

It's been a long time between drinks - or more accurately, posts on the forum....

In the New Year I will hopefully be looking for development finance to construct 4 townhouses in Townsville. I would expect the construction cost - including capitalised interest - to be around $1M. The plan is to hold all 4 properties as the rental yield on the completed project should be at least 7% and the LVR on completion would be around 70%. I will probably need to strata-title the dwellings to get the best valuation, even though this will add to my holding costs when they become long-term rentals.

The block I will be building on is to be subdivided from a residential block I own, so depending upon how the valuations stack up once the subdivision is done, it may be that I have no debt attached to the block I'm intending to build on - hopefully something in my favour...

I have a few questions for the finance guys out there.

1) Are there lenders who would finance 100% of the construction cost (including capitalised interest) if the projected LVR at completion was around 70-75%?

2) If I was doing this today, what kind of interest rate would I typically be looking at?

3) The only development experience I have prior to this was a duplex pair I built around 6 years ago. For that build I was able to get an 80% loan (based upon projected final value), which covered the building contract price. What I didn't cater for were the additional costs outside of the building contract, such as council headworks, landscaping and variances to the contract. These probably amounted to $30K which I had to find at very short notice, so I'm keen to not get into the same position again. It is possible to get the lender to finance all of these additional costs, rather than just the base building contract figure?

Thanks in advance.

AdamW

 

[Aaron_C]

1) No. 80% max for residential. Either 80% of hard costs (land + construction) or 80% of on-completion value, whatever is the lower.
2) Residential rates. Circa 6%, maybe even cheaper.
3) Lenders will only fund hard costs (land+construction) but can give some allowance for soft costs etc that you have made (and can prove).

 

[Rolf Latham]

1) Are there lenders who would finance 100% of the construction cost (including capitalised interest) if the projected LVR at completion was around 70-75%?

yes, but GRV lenders arent cheap, or easy to work with

because you are unsure of your land value you may be able to get quite a distance with the underlying value of that

very few lenders will do more than 3 on resi terms, with most ( but not all of these things being commercial transactions - with later resi refinances)

ta
rolf

 

[westminster]

I have rolled certain soft costs into my 4 villa loan - mainly siteworks, headworks, strata and landscaping. All are being undertaken via my builder and are listed in my building contract.

In my experience my bank was happy to include them as I had a heap of security and they were itemised - ie it wasn't like I said "and can I please put $30k on top to finish off stuff". Banks don't like 'stuff' they like quotes/vendors/details.

With variations your builder should be able to do preliminary pricing before building contract so that it can be included so that bank can factor that into the valuation. That way if you want to add double the amount of power points then it's factored in. I have *everything* in my building contract - dishwasher, landscaping, air con, window treatments etc.

Are you able to put anything up as security?

As to 2) I have my freshly minted loan with Heritage Bank for 4 villas on residential terms on 5.6% fixed for 3yrs and 5.93% Pro Pack Variable with Offset (40:60 split)

 

[AdamW]

Thanks for the responses everyone - appreciated.

It sounds like a residential loan would be the way to go (cost-wise) but it's going to depend a little on valuations both on the subdivided land and also how the development gets valued.

Anyway, it goves me something to look into as I wait for the DA (fingers crossed).

Westminster I have used Heritage before and was impressed with them. It sounds like you have got great terms through them. I am not in as strong a position as you security-wise by the sounds of it, but as I have a local Heritage branch I will try them first.

Cheers,
AdamW

 

[Aaron_C]

Heritage are OK but they are very hard to service on. You basically have to have either a) no other debts or b) be some high income earner on $1m per year.

 

[westminster]

Adam,
Talk to one of the brokers on here and let them know your complete scenario and situation. Then they will be able to offer the best advice. If you choose to go with them they'll contact a range of banks outlining your situation and the banks will let them know if it meets their terms.
In my opinion it's better to do it that way.
Good luck with DA. My DA application is in too - hopefully only a couple more weeks before mines approved.

 

[Rolf Latham]

Westminster I have used Heritage before and was impressed with them. It sounds like you have got great terms through them. I am not in as strong a position as you security-wise by the sounds of it, but as I have a local Heritage branch I will try them first.

Cheers,
AdamW

Pls make sure that you dont allow a formal application to a conditional to take place unless they canprove to you

1. that your position services on THEIR calculator
2. That there is a clear policy distinction for 4 units on one title to be subdiv at completion,vs 4 titles at survey

ta
rolf

 

[AdamW]

Thanks and good luck wm. My application has been in for 18 months - a long hard road. Maybe 2013 will be the year.

AdamW

 

[mattnz]

Thanks and good luck wm. My application has been in for 18 months - a long hard road. Maybe 2013 will be the year.

AdamW

Are you fully compliant with the code, or trying to push the boundaries?

18 months sounds an obscenely long time for a DA. What have they been saying the hold-up is?

 

[Shahin_Afarin]

Try dealing with Kuring gai or Warringah councils!

 

[AdamW]

Are you fully compliant with the code, or trying to push the boundaries?

18 months sounds an obscenely long time for a DA. What have they been saying the hold-up is?

Hi Matt,
No, it is outside the allowable code, which is one dwelling per 300m2. My block is 1820m2, and the DA is to split this into two 900m2 blocks, and to build 4 townhouses on each block. My plan is to then build 4 townhouses on one block, and for the time being keep the other block as it has a house in rentable condition. Further on down the track I might develop this block too, or on-sell with the DA.

The delays are many-fold - council, town planner, me - I have a day job and am 1000km from Townsville so I cannot always dedicate the time to this project that I need to. But I am the least guilty of the parties I have mentioned

Cheers,
AdamW

 

[westminster]

Hi Matt,
No, it is outside the allowable code, which is one dwelling per 300m2. My block is 1820m2, and the DA is to split this into two 900m2 blocks, and to build 4 townhouses on each block. My plan is to then build 4 townhouses on one block, and for the time being keep the other block as it has a house in rentable condition. Further on down the track I might develop this block too, or on-sell with the DA.

The delays are many-fold - council, town planner, me - I have a day job and am 1000km from Townsville so I cannot always dedicate the time to this project that I need to. But I am the least guilty of the parties I have mentioned

Cheers,
AdamW

Wow that is really outside code. I would have never even considered thinking about 4 as it only just enough for 3. I have 1224 sqm for my 4 with a Design Code min 270m2 and average 300m2 block size. As it is, I have to 'borrow' land from common areas to make it work.

Can I ask why not go for 1200 (4) + 600 (2)?

 

[AdamW]

Wow that is really outside code. I would have never even considered thinking about 4 as it only just enough for 3. I have 1224 sqm for my 4 with a Design Code min 270m2 and average 300m2 block size. As it is, I have to 'borrow' land from common areas to make it work.

Can I ask why not go for 1200 (4) + 600 (2)?

Yes that would've been far easier (particularly with hindsight!). But I suppose it came down to the old adage of trying to get the "highest and best use" of the land. I first approached my architect with ideas of getting 10x2 bed units, but that didn't seem feasible. So now we are going for 6x3 bed/2.5 bath/1 lug and 2x2 bed+study/2.5 bath/1 lug two-storey townhouses and 6 visitor car spaces across the two lots.

The 1821m2 block has street access at both ends and the existing house is situated close to one end, making it ideal (or so I thought) for a two-stage development.

Cheers,
AdamW