Do you live in Melbourne, Australia? If so, you’re one of the lucky ones. This city has been voted the world’s most liveable multiple times in recent years, and there’s a reason for that.
With stunning green spaces, state of the art sports and entertainment facilities, more eateries, bars, cafes and pop up shops than you can shake a stick at.
Melbourne truly is an incredible city worthy of all its accolades.
There’s so much to do on any given day its not funny. From the National Gallery, through to the Spring Racing Carnival, MCG, White Night, the Myer windows and so much more!
So, if you’re a Melburnian you’ve probably clicked through to this article for a reason, right?
You want to know everything there is to know about property development finance in Melbourne.
Well, you’re in the right place. With years of industry experience between the team.
Little Fish Property Developments know a thing or two about residential property development in Melbourne, wealth generation and project management.
We also know what you need to know about getting your finance sorted in this city.
So if you’re keen to learn more about the sources of finance for your real estate development project. Or if you’re just testing the waters, read on to discover!
We’ll start with the basics and move on from there.
If you need information and development project cost examples click here.
What is Property Development Finance?
Finance put simply, is when you borrow money to fund a purchase. A very basic example of finance is a credit card with a small limit (like $500-1000).
Another example is a car loan or personal loan to fund a holiday, renovations or other purchases you can’t immediately afford.
Most people will likely take out a credit card, car loan and a home loan with a mortgage, and stop there.
But for those looking to build wealth through residential townhouse property development.
You’re going to need a property development loan unless you have enough capital to fund the project yourself.
This is a loan that is designed to fund the construction of multiple dwellings on one lot of land. This could be a side by side dual occupancy design in Melbourne.
Which is a residential property development loan. All the way up to a mixed-use commercial and residential high-rise. For this, you’d want a commercial property development loan.
For the purposes of this article, we’ll be focusing on the residential finance aspect.
We have another article you can check out if you are interested in some tips for getting a business loan for property development.
How Much Can I Borrow?
Melbourne lenders generally classify the type of developments you’ll want to do (2-3 unit projects) as a residential development and will be less strict in lending criteria than larger projects.
The benefits of these types of projects are that they have relatively little risk and often can provide a great return on investment. They are the perfect way to begin building your wealth as a property developer.
Although that being said they will still be stricter than a basic home loan or investment property loan. You need to keep this in mind.
As you go along as you might have had a cruisy experience getting finance for your own home or for an investment property, people can be surprised at the hoops you have to jump through to get property development finance in Melbourne!
How much you’re able to borrow is known as a loan to value ratio or LVR. Usually, you’ll need to provide about 20 per cent of the funds upfront for a dual occupancy subdivision. Or around 30 per cent for a larger build.
For example, if the construction contract for your Melbourne dual occupancy development project is 1 million dollars, you’ll need to put in $200, 000 of your own capital.
This isn’t a small change, generally, most people will use the equity they have in their home to fund this.
What Type of Lender?
Back in the day, the only way to get any sort of residential property development finance for any sort of venture was through a bank. Yet recently, with the Royal Commission and a lot of bad press, banks are becoming much stricter on their lending criteria and often want to see evidence of off the plan sales first.
They are lending less and requiring more of your capital upfront. So you can approach a bank directly but be prepared to go through a bit of a process. And leap through some hoops.
Another option to get in with a bank is to use a loan broker. A broker is a professional whose job it is to find their customers a great deal on a finance product. They get paid a commission by the lender for finding them a customer.
There are a few specialised development loan brokers in Melbourne, a quick Google search will find them for you.
Or, if you’re taking an armchair developer approach (which is fine!) then ask your trusted project managers to take care of approaching lenders or brokers for you.
Finally, another option is to approach non-bank lenders or private lenders. These are usually companies that manage personal trusts or other pools of money.
They require less LVR but can throw in fees and levies aplenty and also charge a higher interest rate.
It’s worth doing some extensive research before considering any lender and deciding which is right for your needs.
Another option worth looking into is joint venture property development finance.
Finally, one last thing when considering property development finance in Melbourne is despite who lends you money it’s possible they are going to want to see some pre-sales prior to coughing up any funds.
It’s not always the case, especially with the smaller size developments we here at Little Fish specialise in, but it’s still something you need to be aware of.
Of course, this means investing some capital upfront but as we mentioned earlier these types of residential property developments in and around Melbourne are low risk and usually high return so they’re definitely worth the time and effort if you’re in the right position financially.
Keen on More Info?
If you’re interested in learning more about residential property development finance. Or how Little Fish property development consultants can assist you with your next project, don’t hesitate to reach out 1300 799 277 because we’d love to hear from you!