Rates on this deal

Discussion in 'Property Finance' started by Sabretooth, 24th Jun, 2013.

  1. Sabretooth

    Sabretooth Member

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    OK new to property development and would appreciate your advice. :)

    Building 6-8 2x2 apartments within the Perth Metro.
    Project $1.7M conservative value upon completion.
    Will use primary residence as additional security value $1.8M
    Need to borrow $2.2M in total (which includes current mortgage for primary residence). This will cover me for interest in advance and contingency.

    What interest rates could I expect for this and who is set up to lend for this type of proposal? Any recommendations for brokers/banks?
     
  2. Aaron_C

    Aaron_C Finance Broker

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    Do you have the DA? GRV sounds low.

    In any case, it depends on what you want. Are you gonna presale? Keep them all?
     
  3. Sabretooth

    Sabretooth Member

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    Yes GRV is a low estimate could increase to $1.9-1.95M if not selling off the plan. No DA yet, but it should be fairly straight forward.

    Not sure whether we will keep the units or move onto the next project. They will be cash-flow positive upon completion so should be easy to keep. But the lure of doing another project may kick in so we will probably end up selling.
     
  4. imbi3

    imbi3 Member

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    You would have to go with commercial loan
    However, if you are new to development, this project seems a bit too complex for your first one?
     
  5. Aaron_C

    Aaron_C Finance Broker

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    Well if you haven't got your DA first then the finance is a moot point for now. You should speak to a broker to get a rough idea but without anything more it isn't that necessary. As imbi3 said it will be a commercial loan with commercial rates.
     
  6. Sabretooth

    Sabretooth Member

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    Who offers the best commercial loans and what rates should I expect for this type of deal?
     
  7. Rolf Latham

    Rolf Latham Member

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    very much like asking what car has the lowest price and the lowest service costs ...........when you havent workd out which car you actually need

    Big diff between a Chery J1 and AMGE63.........

    Comm isnt like resi, pricing is close to deal specific.


    ta
    rolf
     
  8. sanj

    sanj Member

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    i have to say that a few things here have made me concerned on your behalf.

    - seems like your first development and you wish to do 8 apartments (a big first step)
    - seems like it will be X-coll with your PPOR which is asking for trouble
    - assuming a DA will be easy for multis is more than a little brave/naive
    - average worth of $283k for a 2x2 means that your margins will be very slim/non existent


    i think before you do anything please at the very least sort your structures out and make sure your feaso is as accurate as you can get it, including a fairly fat contingency
     
  9. westminster

    westminster P Plate Developer

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    Make some time to have a chat with any of the brokers who have replied here - they are all seasoned investors, some like Aaron have experience of their own with multi dwellings, and they know the ins and outs of commercial loans for multis and how to avoid the evil Cross Collatoralisation

    If you are going into a commercial loan venture don't tie your PPOR up into it. Get a Line of Credit (or similar) on your PPOR to fund the deposit required by the bank. Make sure you have costed everything so that you at least have a 20% profit margin - don't go into it without this sort of margin as it offers you a bit of a buffer and the right amount of profit for the slog ahead.

    DAs can vary wildly in time to get - I bought Highgate in December and getting closer to DA being approved but still a way off. Gwelup was bought in July last year and I only got the building license last month - yes almost 12mths of holding costs!!

    Your accountant will also have kittens if you change your mind too many times on if you are holding, keeping or some hold, some keep. As they need to work out the GST on the development. On a development this size it will be deemed income not CGT I'd say. That is another 10% you need to factor in.
     
  10. Aaron_C

    Aaron_C Finance Broker

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    Hard to say. Depends on what you need. Rate isn't that important for development loans anyway since it is progressive drawdown and the project only lasts 12-24 months.
     
  11. Sabretooth

    Sabretooth Member

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    Ok its good to get a consensus that this will be a commercial loan at commercial rates. Its also good to know that the rates vary depending upon the deal / business case.

    Yes the margins are slim, so there is no room for error. My contingency is currently at 10%. My costings have been reviewed by a builder so are hopefully OK for now. I will go to tender for the final costs and lock in a fixed cost contract before going ahead. I will also get my lawyer to draw up some commercial penalty clauses for late build completion.

    I have had several discussions with the council and they are supportive of the overall concept. There may be a bit of back and forth but to date we have been within their detailed design guidelines.

    Thanks for all your comments, I now understand that I have entered a whole new ball game and will need to professionalise a bit prior to approaching lenders. I will get the DA in place and some independent costings, perhaps use a quantitative surveyor and put together a project brief / business case.

    Any advice how I can structure the loan so that I am not using the PPOR as security, I was thinking this would be unavoidable if I was to get finance? In other words, given my lack of experience in property development the lender will want something more than just the development as security??
     
  12. Sabretooth

    Sabretooth Member

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    Posted my question above prior to reading this thanks. I will look into doing this.
     
  13. Rolf Latham

    Rolf Latham Member

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    "simply" get a LOC to 80 or90 % of the value of the available equity in your PPOR and release the cash, which you then put into the new development.

    Providing the vals are good and serviceability is ok, should be easyish

    ta

    rol
     
  14. Brady

    Brady Big 4 Banker

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    Set up a separate facility first, pending serviceability.

    As mentioned contact a experienced business banker / broker to help you out.

    Planning is the most important part, not just the build but the finance and exit/sale strategy.

    Good luck
     
  15. Sabretooth

    Sabretooth Member

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    Got in touch with a friend of mine, who is also a broker - residential. They did some digging for me and this is the type of deal they have tentatively come back with.
    • LOC against PPOR - $1.4M - 5.2%
    • Commercial loan against Development - $0.8M - 7% + 0.7% upfront
    I would need to sell 3 units off the plan and build with a reputable builder.
    Does all of this sound OK or should I shop around? Commercial rate seems high but I could just be used to residential lending? Will some lenders lend without the condition of presales?
     
  16. Marty McDonald

    Marty McDonald Mortgage Broker Syd

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    Be careful which lender you choose for the loc...not that many would be happy to give you a heap of cash out knowing the purpose of the funds.