There are several factors you need to consider before deciding whether property development is right for you. This includes the different finance options available for your project. Needless to say, finance for property development is more complex than regular residential lending because of the higher costs involved.
You may need different lending types for the different stages of the development project:
– An acquisition loan that covers the purchase, application, and pre-construction costs
– A construction loan that covers the building costs and
– An investment loan for long-term investments
The construction loan is typically structured so the lender finances up to 70 or 80 per cent of the project’s final cost and the developer is expected to provide some funding towards the development. A developer typically needs to provide 20 per cent of the costs for a two-dwelling project and about 30 to 35 per cent for larger projects or commercial loans.
Just like a standard residential new build loan, construction loans offer staged payments that are finalised at the end of each stage, typically: the deposit, base stage, frame stage, lock up stage, fixing stage, and completion.
You would need to show the lender that you have considered all project variables and still allow for some contingency funds. The lender would ask for the project’s development type, site zoning and description, design concept, land and construction costs, projected sales figures, construction timelines, the developer’s financial strength, available equity, development track record, and miscellaneous costs.
Valuation
The lender would need to provide finance for the construction, so they need to review your financial application meticulously at the beginning of the process and not the end.
A professional valuer from the bank’s independent firms will investigate any potential issues that could possibly derail your project financially. They will review your feasibility study and look for any missed expenses as lenders typically want to see that the project can make at least a 15 per cent profit.
Mistakes to avoid at the finance stage
One common mistake in feasibility studies is not including tax and holding costs. Avoid stacking up the numbers just so the project will look better and never cross-collateralise your projects with your existing properties! Remember – it’s always better to err on the side of caution.
Take everything with a grain of salt as the information in this article is general in nature and does not constitute personal advice! If you want us to look into your personal objectives, financial needs and situation, just sing out and we’ll give advice tailored just for you. Take advantage of our years and years of experience dealing with all sorts of property developers!
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