Funding a two townhouse development

[perthguy]

I would like construct two townhouses next year. Final cost including, survey strata, servicing and mods to a retained dwelling should not exceed $650,000.

I can't cover the full cost of the construction with available funds. So I have two options:

Option 1
Commence construction, get the buildings to plate height, apply for strata title, go to title. At the point where I need to secure additional funds, the townhouses should be between roof on and lockup on their own strata lots. I may even be able to prioritise one and get it to lockup. With a conservative end value of $550,000, would a bank allow me to borrow against a house at lockup to finish the development? I may need up to $200,000 to completely finish. I see this option as risky.

Option 2
Apply for a construction loan before commencing. This probably makes more sense but a) I'm not sure if I can even borrow the whole amount required for the construction b) higher interest rate and c) bank controls the payments. I have seen people burned before when the bank made premature progress payments. I see this option as less risky overall.

The lender is likely to be ING Direct. It would be good to know before I start if Option 1 is going to be a huge hassle at the time I need additional funds.

The reason I am exploring this option is that my plan was to build one now (which I can do with available funds) and one later, by borrowing against the first one. However, the builders I have spoken to don't like that idea because of site issues. The services have to be done at the same time. Once the services are done, it is better to pour both pads. Then it's not a great idea to leave a pad for too long before starting the brickwork. Brickwork can be staggered but it is better to pour both second floor slabs at the same time. Once that it done, the second storey bricks should go up because the scaffolding is already on site. I'm not sure there is a feasible way to delay one of the townhouses while the other goes to lockup. However, I am speaking to more builders on the weekend, so I can put it to them and see if there is a solution.

If there is, what might the issues be with borrowing against a townhouse that has reached lockup stage but is on its own strata lot?

 

[Rolf Latham]

few things

Id o for the upfront loan almost every time

Part completed constructs make for poor security

ING wouldnt be my pick for anything needing post settlement service.

CBA WBC and a buncg of others do multi construct like yours smoothly

ta
rolf

 

[perthguy]

ING wouldnt be my pick for anything needing post settlement service.

Thanks Rolf. Just following up on the ING comment, is that because they require full doc for any loan adjustments post settlement, just like a new loan, or are they just difficult?

 

[Peter_Tersteeg]

Option 1 is a disaster waiting to happen. Trying to get finance for a partially completed building isn't impossible, but it's not something you want to do deliberately.

Option 2 via a construction loan is done all the time. The rates are usually the same as a regular loan, the loan will be funded against a contact with the builder. Construction loans aren't always straight forward, but they're not that hard either. Some additional comments.

If you can't afford the loan in option 2, there's no way you'd qualify for the option 1 scenario.
You choose when to pass the invoice on to the bank, so in effect you have a lot of control over the progress payment. If the bank makes a payment prematurely, it's because the borrower mucked up.

ING is not a lender I'd suggest for a construction loan. They can do it, but there's other lenders that do it better. They're also difficult with accessing equity, which is something people often want to do after a successful construction project.

What's your reason for choosing ING?

 

[Rolf Latham]

Thanks Rolf. Just following up on the ING comment, is that because they require full doc for any loan adjustments post settlement, just like a new loan, or are they just difficult?

ING isnt good at any post settlement work in my limited experience with them.

They are a good option for Ma n Pa set and forget.

ta
rolf

 

[perthguy]

Option 1 is a disaster waiting to happen. Trying to get finance for a partially completed building isn't impossible, but it's not something you want to do deliberately.

I suspected as much. It was very straightforward to build one first, then build the other one. I will talk to some more builders to find out what is possible.

You choose when to pass the invoice on to the bank, so in effect you have a lot of control over the progress payment. If the bank makes a payment prematurely, it's because the borrower mucked up.

Borrower was interstate, bank did a lockup inspection and charged borrower, bank released progress payment, borrower arrived back in the state and the property was not at lockup, builder went broke, borrower to cover the shortfall or sue the bank. I know this is an unusual situation but it makes me wary.

What's your reason for choosing ING?

It was a good deal when I was only building one townhouse. The first townhouse can be completed using residential loans with great interest rates! That's all approved. It's just messy that they appear not to be able to be completed as two discrete projects as I had assumed. Still, I have some great builders to talk to on the weekend and they may have some options I don't know about.

 

[perthguy]

Considering the end value of the townhouses are likely between 1.1 and 1.2 million, I feel I am being a bit blase about the whole thing. I just want to sign up a great builder, get stuck into it and hope for the best

But I know that is a bad idea, hence my post. I need a reality check even though I know that option 1 is a bad, bad idea.

 

[Rolf Latham]

It was a good deal when I was only building one townhouse. The first townhouse can be completed using residential loans with great interest rates! That's all approved. It's just messy that they appear not to be able to be completed as two discrete projects as I had assumed. Still, I have some great builders to talk to on the weekend and they may have some options I don't know about.

similar rates are available with lenders that do this stuff every day.

For peopslooking at this post in the future , for anything but vanilla deals,with no future structure requirements, the points saved on rate are lost many times over for many different reasons.

ta
rolf

 

[perthguy]

similar rates are available with lenders that do this stuff every day.

For peopslooking at this post in the future , for anything but vanilla deals,with no future structure requirements, the points saved on rate are lost many times over for many different reasons.

ta
rolf

That's good point and I know the structure is not going to work for two units. The deal for the first townhouse is 4.63% variable. If I was just building that to set and forget (it's a long term hold), that would be great!

The complicating factor is the second townhouse that I was not planning to build until 2016. Out of interest, what kind of rates to fund say a $600,000 construction loan and recommended lenders?

I still have the option of applying for a construction loan to build the whole thing. First step is to talk to some more builders to find out what is possible.

 

[Rolf Latham]

The complicating factor is the second townhouse that I was not planning to build until 2016. Out of interest, what kind of rates to fund say a $600,000 construction loan and recommended lenders?
.

My response would be to look at making sure that your end game goals are correctly defined,and thence build finance structure around that.

Not doing that, for many is like going to build a home, NOT to a structured plan, but some mud maps...............

2 good perth based brokers that post here

Colin Rice and


Jess Pel


ta
rolf

 

[perthguy]

Something additional, my original plan was to build one townhouse Perth in 2015, one townhouse Melbourne in 2016, look at a MR build in 2017 and then Perth townhouse 2 in 2018 (or in 2017 if the MR build does not go ahead).

I'm going to put that to the builders to I talk to on the weekend and see if what we can do to hold off building Perth townhouse 2 until 2017/18.

 

[Marty McDonald]

The fact that Ing won't take land as security gives you idea of their appetite for construction. Avoid IMO.

If servicing is an issue have you considered using future rental incomes on both townhouses in your calcs? Would be accepted even if selling one.

 

[perthguy]

My response would be to look at making sure that your end game goals are correctly defined,and thence build finance structure around that.

Not doing that, for many is like going to build a home, NOT to a structured plan, but some mud maps...............

You are right. The reason this sounds so ad hoc is because it is. I am diverting from a clearly planned out, financed and costed investment strategy that I have had in place for three years. I am going to have to look at this more closely because it wasn't my plan and I don't think it is going to work. I think my original plan worked better so will see what can be done to get me back on track. Thanks Rolf, that's helped at lot!

 

[perthguy]

The fact that Ing won't take land as security gives you idea of their appetite for construction. Avoid IMO.

If servicing is an issue have you considered using future rental incomes on both townhouses in your calcs? Would be accepted even if selling one.

I'm going off the whole idea of trying to build two without planning it out properly. The only reason why it was worth exploring is because I have the potential to increase the value of my property portfolio by 1.1 to 1.2 million. Of course that is tempting. However, trying to do that without proper planning and without thinking it through is a bad idea. That extra $600k in my porfolio would have been nice though and I still have the option of planning it through properly.

 

[Rolf Latham]

You are right. The reason this sounds so ad hoc is because it is. I am diverting from a clearly planned out, financed and costed investment strategy that I have had in place for three years. I am going to have to look at this more closely because it wasn't my plan and I don't think it is going to work. I think my original plan worked better so will see what can be done to get me back on track. Thanks Rolf, that's helped at lot!

You are welcome

Much of of our work isnt about loans at all - Loans are a sideshow.

Our real work is providing tools to peops so they can work out what they want, why they want it, make them understand what the REAL price is of chasing that dream ( or not) and then help them ways to tie it all together with a loan or 3, some brown paper, vinegar and twine.

ta
rolf

 

[westminster]

I would like construct two townhouses next year. Final cost including, survey strata, servicing and mods to a retained dwelling should not exceed $650,000.

I can't cover the full cost of the construction with available funds. So I have two options:

Option 1
Commence construction, get the buildings to plate height, apply for strata title, go to title. At the point where I need to secure additional funds, the townhouses should be between roof on and lockup on their own strata lots. I may even be able to prioritise one and get it to lockup. With a conservative end value of $550,000, would a bank allow me to borrow against a house at lockup to finish the development? I may need up to $200,000 to completely finish. I see this option as risky.

Option 2
Apply for a construction loan before commencing. This probably makes more sense but a) I'm not sure if I can even borrow the whole amount required for the construction b) higher interest rate and c) bank controls the payments. I have seen people burned before when the bank made premature progress payments. I see this option as less risky overall.

The lender is likely to be ING Direct. It would be good to know before I start if Option 1 is going to be a huge hassle at the time I need additional funds.

The reason I am exploring this option is that my plan was to build one now (which I can do with available funds) and one later, by borrowing against the first one. However, the builders I have spoken to don't like that idea because of site issues. The services have to be done at the same time. Once the services are done, it is better to pour both pads. Then it's not a great idea to leave a pad for too long before starting the brickwork. Brickwork can be staggered but it is better to pour both second floor slabs at the same time. Once that it done, the second storey bricks should go up because the scaffolding is already on site. I'm not sure there is a feasible way to delay one of the townhouses while the other goes to lockup. However, I am speaking to more builders on the weekend, so I can put it to them and see if there is a solution.

If there is, what might the issues be with borrowing against a townhouse that has reached lockup stage but is on its own strata lot?

I would go for option 2 every time.

Most DAs will request that both are constructed at the same time. So you might not have a choice from Council unless you are applying as 2 seperate DAs which can get messy as well. If you have the funds to do one why not do both at once by borrowing the other half?

I have always had to approve that work is completed before the bank will pay the builder. If you are away you can ask the builder to take photos to prove the works are done before you direct the bank to release the progress payment

 

[perthguy]

I would go for option 2 every time.

Most DAs will request that both are constructed at the same time. So you might not have a choice from Council unless you are applying as 2 seperate DAs which can get messy as well. If you have the funds to do one why not do both at once by borrowing the other half?

I have always had to approve that work is completed before the bank will pay the builder. If you are away you can ask the builder to take photos to prove the works are done before you direct the bank to release the progress payment

Thanks. This sounds like the most sensible plan.

 

[sanj]

I think you're over complicating what is a pretty straight forward thing.

Get a good broker, get a good builder, get a construction loan, appoint an independent inspector to come it at each progress payment stage and most of the issues you've mentioned that have made you consider this convoluted path will be taken care of.

I actually disagree with WMs suggestion above, I wouldn't rely on the builder taking photos because that simply proves the work has been done to an extent, not that it's been done right.

Get someone else in acting for you

 

[perthguy]

Get a good broker, get a good builder, get a construction loan, appoint an independent inspector to come it at each progress payment stage and most of the issues you've mentioned that have made you consider this convoluted path will be taken care of.

Thanks for the reminder about the independent inspector. I had forgotten about that. Is that something I need to include in the contract, that I will be getting an independent inspector on site to inspect the completion of each stage?

 

[sanj]

Thanks for the reminder about the independent inspector. I had forgotten about that. Is that something I need to include in the contract, that I will be getting an independent inspector on site to inspect the completion of each stage?

You certainly can, I did.