Understanding Development Finance: Financing Your Property Development
Development finance refers to the financing of residential, commercial, and industrial property developments, including construction projects. It typically involves obtaining loans for land purchases and staged payments for development costs.
If you’re considering funding your next property development, it’s important to address your initial questions and plan ahead. Whether you’re aiming for long-term rental income or seeking opportunities to maximize your investment, there are solutions available to simplify the process. Here are some steps to set you on the right path from the beginning.
Funding levels will vary at each stage of development due to the distinct nature of each project.
Steps to Get Started with Property Development:
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Acquire Land: Depending on current housing regulations, a deposit of around 30-40% is typically required for land purchases. It’s advisable to have some extra funds for added security.
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Obtain Resource Consent: This process can take 6-8 months and depends on the zoning regulations that determine the number of properties allowed on the land and the maximum height of the development. Involving a planner or architect can assist with the resource consent process.
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Secure Building Consent: Building consent may take 2-6 months. During this phase, you can search for a main contractor. Well-drawn building plans contribute to a smoother approval process.
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Commence Construction: Once building consent is granted, construction can begin. The duration will vary based on the complexity of the project, such as the number of houses and any challenging factors like slopes or long driveways.
30% Deposit Requirement: For a typical development project, a 30% deposit of the total project cost is advisable. Deposit requirements vary depending on the lender and project specifics.
Example of Property Development: For a $2.5 million project, having around $750,000 in equity (property value or cash) is recommended.
Loan-to-Value Ratio (LVR) and Capacity: Lenders’ capacity for development loans is generally influenced by the number of dwellings in the planned development. More dwellings typically require a larger deposit. The larger the quantity of dwellings, the higher the borrowing capacity.
Consider Goods and Services Tax (GST): When calculating your development project costs, don’t forget to account for GST. You’ll need to claim it on building expenses and factor it in upon completion. Lenders fund based on GST-exclusive amounts.
Two Financing Options for Development Projects:
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Build to Hold: In this scenario, once construction is complete, you retain the properties and rent them out as investments. The bank evaluates your situation as they would for an investment property, considering future rental income in the servicing calculations. An additional 15% contingency is typically required in your borrowing power to mitigate potential cost overruns.
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Build to Sell: If you plan to sell some or all of the newly constructed properties, the lender focuses on pre-sales rather than rental income. No income calculations are considered, and a floating interest rate is usually provided until construction is finished. The lender assesses the amount you need based on market circumstances and the time required for construction.
By understanding the ins and outs of development finance and exploring the available options, you can effectively fund your property development project.
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