Development finance

[Jmag]

Hey all,

I have a few questions, i am researching and in the very early stages of commencing my first development project. I have a single house in Victoria on 800sqm which is on the front of the block and am looking to build a second house on the rear block next year and hold on to both.

Lets call the front house IP1 and the new home when finished IP2 to make this faster. IP1 currently has a single loan about 90% LVR. I do not have much money in savings and want to use the banks money to pay for as much of IP2 as I can. How do i go about structuring my finances for the development? Any advice is welcome have a nice day.

 

[Rolf Latham]

Welcome to the forum

Will the block of dirt be subdivied from the exsiting house before you start the build ?

ta

rolf

 

[Jmag]

Thanks Rolf,
That one of the things i'm trying to work out, is it neater and easier from a finance point to pay for the subdivision first then borrow from against the value of the finished IP2????

Or like in my case is it easier not to sub as i'm keeping both places but then how does this way work for finance?

 

[Rolf Latham]

Thanks Rolf,
That one of the things i'm trying to work out, is it neater and easier from a finance point to pay for the subdivision first then borrow from against the value of the finished IP2????

Or like in my case is it easier not to sub as i'm keeping both places but then how does this way work for finance?

depending on locn and market a separate title and house will add 15 to 30 % to the valu,and it looks like that is critical for you to complete this one in a timely manner AND if properly set up provide some fuel for the next deal

ta
rolf

 

[SUser88]

Hi Jmag,
Any further progress made here?
I'm looking at doing something similar myself. Have read some other threads relating to construction loans, but as far as i am aware you can only do this with a registered building contract. If your looking to owner build/manage the development yourself I believe you'll need to find the equity yourself.

A colleague is currently subdividing in a Melbourne suburb. He reckons he completed the subdivision for 7K. He is going to finance the build himself (borrowed money from his folks). He believes he can build a 2 bedroom town house on the battelaxe block for 130K.

What are you broader plans in terms of building/selling/renting?? Are you going to rent both IPs?

 

[albanga]

I am quite curious on this myself.
Will the bank lend based on the finished value or based upon the build contract.
An example with my block which I am soon to subdivide.
Lot 1 has an existing house and valued at around 500k.
Lot 2 has has plans and building quotes are around 380k. The completed dwelling I estimate value around 650k.

So will they lend the 380k with LMI at 100% LVR.

Will they lend the 380k but based on a 650k end value the LVR would be 63.3% so no LMI.

Lend the 380k and use the front property as security as it is currently at a low LVR.

Would need to draw the 76k equity from front property for 20% deposit and no LMI.

OR something totally different

 

[albanga]

A colleague is currently subdividing in a Melbourne suburb. He reckons he completed the subdivision for 7K. He is going to finance the build himself (borrowed money from his folks). He believes he can build a 2 bedroom town house on the battelaxe block for 130K.

Hey Stevechal,
I think your friend may have missed some key things in his estimations.
When he says subdivided for 7k that may mean plans and permits approved and maybe subdivision but he now needs engineering drawings and then connection of all utilities. Has he confirmed his storm water? No clear connection to the storm water and add 10k minimum to the sums. Realisicaly your looking at 30k for a subdivision.

As for 130k, unless he as in the trade (builder, carpenter) I think this is s big call. I would be adding 20k minimum to that and if on any form of slop probably another 20. My block slopes with no storm water and that has added 45k to the build quotes.

 

[Qlds007]

On a residential deal you wont get a lender lend against GRV so will be a percentage of fixed price cost.

On a development deal you would get a a loan based on GRV however you are looking at different rates, fees etc.

 

[albanga]

On a residential deal you wont get a lender lend against GRV so will be a percentage of fixed price cost.

On a development deal you would get a a loan based on GRV however you are looking at different rates, fees etc.

How does GRV work in terms of what they will lend?
Let's say for example a 370k build contract and the property will rent for 500 a week. What is the rough calculation they will use?

 

[Terry_w]

You should consider apportioning loans between the 2 houses as well. This won't be just half each, but you will have to base it on land size and value, and value of the existing house. You will need a valuer and tax advisor to work it out.

This could be done after the construction is done. Should be done because if you ever sell one you only want to pay down the minimum off the loan and then leave some proceeds to pay off your non deductible debt - while maintaining maximum deductions on the remaining house.

 

[Qlds007]

Depending on the location, level of experience, asset value etc etc we have got upto 70% net GRV.

It is usually GRV or percentage of cost whichever is lesser.

Cheers

 

[D.T.]

You should consider apportioning loans between the 2 houses as well. This won't be just half each, but you will have to base it on land size and value, and value of the existing house. You will need a valuer and tax advisor to work it out.

Can't I just spreadsheet it after watching a couple of youtubes?

 

[eggnog]

Oh DT, you just diiiidn't