Property Development. Parents as Guarantors

[theos86]

My partner and I have been looking at buying a property for approx $350k, knock down, subdivide, build 2 houses and sell. Total lending approx $850k.

Partners parents have $1.6mil in property freehold. Do you think the banks will allow us to use parents as 20% or 30% (whatever is required) guarantor for property development?

Also, would the banks allow us to use parents equity to secure a Line of credit of some sort, say $60k,so we draw on this to pay interest costs during construction phaseetc (ie. no money out of our pockets).

Once properties sold, LOC paid back, profit kept?

Thoughts on this - to me it does appear to be low risk from the banks perspective as total LVR would be low (backed by the guarantee).

 

[Terry_w]

I've just done this for a client. Using dad's investment property to borrow 105%.

Banks don't like it generaly as more risk. If you stuff up parents will lose property so generaally they will only take investment property of parents as security. LOC may be difficult.

If parents are working there are ways to structure things to reduce risk.

 

[Aaron_C]

Banks don't mind as long as servicing is evident.

 

[theos86]

Yeah they definitely have the equity available although i doubt would be able to get a loan for $850k, not with combined income of $140k - plus we cant save $45k a year (approx interest repayments), hence why was hoping to use LOC facility. Or do banks see development in a different way in terms of serviceability. If we did build then hold and rent, we would have no issues servicing both properties.

Partners parents probably earn about $70k per year rent from investment properties - they are early 60's, but retired.

 

[Rolf Latham]

Subject to a few things many lenders will allow total project cost borrowing inc soft costs and interest.

I'd only sponsor/foster such a project where there was a defined exit strategy to release the guarantee at completion, and where parents pis only are used

Ta
Rolf

 

[Aaron_C]

You'd have to speak to a broker about what your options are but it is a bit more complicated with the folks in there.

 

[jonmardell]

There is a couple of ways to go about this. Firstly as you mentioned there is the family guarantee option which would be ok with a a few lenders. Secondly if your parents have the ability to borrow the funds themselves then they could lend it too you for a period of time and you could pay them back on the sale or what ever terms you come up with. The benefit to this is they would not have to get independent legal and financial advice that the banks would require. On your other comment of servicing combined income of 140K is pretty good, you have forgotten to add the potential rent from the 2 properties which can be used in servicing as well.

My partner and I have been looking at buying a property for approx $350k, knock down, subdivide, build 2 houses and sell. Total lending approx $850k.

Partners parents have $1.6mil in property freehold. Do you think the banks will allow us to use parents as 20% or 30% (whatever is required) guarantor for property development?

Also, would the banks allow us to use parents equity to secure a Line of credit of some sort, say $60k,so we draw on this to pay interest costs during construction phaseetc (ie. no money out of our pockets).

Once properties sold, LOC paid back, profit kept?

Thoughts on this - to me it does appear to be low risk from the banks perspective as total LVR would be low (backed by the guarantee).