The Ultimate Guide to Property Development Loans Melbourne
Are you looking for property development loans Melbourne?
If you are, then you’ve probably already decided to try your hand at developing residential real estate for profit. This is a wise choice of investment.
In times past folks would look to investing in existing property and rental returns for wealth generation.
At Little Fish, we have a few aims. First and foremost, we manage the development process for our clients and investors.
But we also strive to educate and inform, both our clients and anyone who may be interested.
We can often see people get tripped up when it comes to borrowing and the numbers. Particularly around the cost of financing of their projects.
So, we’ve put together this useful article – the ultimate guide to property development loans Melbourne.
If your project makes sense and is viable (that is, your numbers stack up), then you should have no dramas getting finance. The only question is what sort of loan structure or type of lending you choose.
There are different types of lending, lenders and structures, and each will have varying costs. The project’s projected costs and your finances will also play a significant role in the above.
If You’re Airtight, You’re Right
If your project looks good on paper and your numbers are clean, you’ll get funding.
What remains to be seen is exactly how much these funds will cost you. Loans require money, in fees and interest. There’s no free lunch here.
Even if your funder costs more than you would like, or you don’t get your desired amount, you’re better off having 80, or even 60 percent of something than 100 percent of nothing.
Don’t Get Greedy
A big tip here is not to be greedy and attempt to retire after your first project. You’re in the long game here.
The key is to get it across the line even if the funding costs more than you like.
Then, you build on your capital, strengthen your position and get cracking again.
A Word About Risk in Property Development Loans Melbourne
In these recent times, most lenders are highly risk-averse. They look after their own interests first and foremost. When deciding if they will loan you money, they will assess risk.
Let’s discuss the risk of property development loans Melbourne.
They will first look at any risks associated with you, and your capacity to repay the loan. This means a credit check, so you need to ensure your credit history is airtight.
If you have a patchy credit rating or history, you want to get it tidied up first. There are a few things you can do to amend your credit rating, but we don’t have space to go into them here.
But research and you’ll find out yourself easily enough.
The Development Risk
The next thing they will look at is the risk related to your development. They will assess if they believe it is viable or not.
Combining the Two
Banks will combine the two risks assessments – the individual and the project. They want to know your credentials as well as ensuring you have an airtight project.
A relationship with a lender is one of the most important relationships you can cultivate as a property developer.
We’ve discussed the importance of relationship management before and here is no different.
Here at Little Fish, we’ve built up a solid reputation which we leverage on behalf of our clients.
Be Professional and Cover Your Bases
The way your finances are presented to the lender is super important. As are your interactions with the lender, either over the phone, via email or in person.
When attempting to secure property development loans Melbourne, you need to be professional in all your dealings. You need to include a detailed feasibility study in any finance application.
This shows you have made plans and contingencies and covered your bases.
Let’s discuss your loan application next.
The Application for Property Development Loans Melbourne
Remember how we discussed a professional finance presentation/application?
This is a plan for your project that demonstrates to a lender that it is viable and worth their money.
This is typically more detailed than an owner-occupier or even an investment loan.
You may want to include a summary of the project that argues its viability, as well as highlighting the design features of your development.
You’ll also want to explore the following in your proposal, especially if you’re planning to sell your properties.
- Cost projections
- Design concepts and renders
- Zoning details
- Resumes of any consultants engaged on the project
- Site description
- Feasibility study (as mentioned)
- Projected sales amounts (if selling)
- Net result
As a key gauge of how much you will get from a loan, a lender usually provides between 70-80 percent of the final expenses of the project, not its end value.
Either you or your partners will be expected to provide the balance of the funds.
Loan to Value Ratio
If you’re looking to finance a dual occupancy project, you’ll probably face less strict lending requirements than with a more substantial development.
For example, if your project costs a total of 2 million dollars, your lender will expect you to contribute around $400, 000 of your equity.
You can generally leverage the equity of an existing property, such as your principal place of residence, for this end.
Consider A Guarantor
If you’re having difficulty acquiring a development loan, or if you can’t quite make up your portion of the LVR, you may consider a guarantor.
A guarantor is someone who agrees to pay your debt should you become unable to pay it yourself. This is usually a parent but could be a sibling, other relative or even a close friend.
Be wary about using a guarantor, though. If things go wrong (and remember Murphy’s Law here), then you may face some bad blood between yourself and the guarantor.
How Are Development Loans Structured?
Property development loans Melbourne are structured very similarly to a residential build loan. This means that the money is paid in stages, not as a lump sum.
These stages are the deposit, which is paid to the builder so they can begin work on the project. Next is the base stage, the frame stage, the lock-up stage and the fixing stage.
Finally, once the project is finished the balance of the funds are paid out.
If you’ve got all your ducks in a row, you’ll be selling your properties off the plan before they’re finished.
This way, you see your settlement money sooner, and you can either pay back the lender quickly or roll over the capital into your next project.
Interest Works Differently on a Development Loan
The way development finance works with regards to interest is slightly different from an owner-occupier loan or even an investment loan.
You can actually borrow the ongoing interest as part of your loan.
This means you don’t pay interest during the build, but the interest is capitalised.
Essentially, the interest gets added to the total you owe the lender at the end of each month, and you then pay interest on the existing interest.
That said, you can never exceed your total loan amount (usually 80%).
Check out this article on three sources of finance to level up your finance knowledge.
When Do I Repay It Then?
Once you begin your sales marketing and off the plan campaign, you could then repay the loan in stages, counting on the final settlement.
You do need to demonstrate to your lender that you can make repayments, however.
Different Loans for Each Stage
Some people get a different type of loan for each stage of their property development project.
You can get what is called an “acquisition” or development loan which can cover the purchase of the land. Next, you can apply for a construction loan to cover your build.
Some people go on to then transfer their loan to an investment loan if they retain the property to rent out.
At Little Fish, if our clients are interested in generating wealth, we advise to sell the properties off the plan rather than retain them.
Yet in some cases, people choose to sell one and rent another, or sell one and reside in the other, which is a perfectly fine strategy if your figures are airtight.
The Lender Will Want Updates
A development loan is not a set and forget injection of cash, leaving you free to do what you want when you want.
Lenders will need some formal evidence of your budgets and expenses before and during your phases.
This is again for them to manage risk. It lets them know you have done your due diligence and allowed for variables.
It is not uncommon for the lender to request a copy of your building contract.
While your project ticks along you’ll need to keep the lender up to date with any progress documentation from your builder, you will also provide reports from your project manager (that’s what we do).
As well as cash flow updates, any revisions to your financial projections and anything like delays in your project.
They will also need to know about any alterations to your feasibilities and any off the plan sales that you’ve made.
Remember, when we discussed the stages of getting the funds? The bank or lender will need evidence that these stages are complete before paying down more money.
We’ve even seen lenders ask for evidence that the builder has paid his wholesalers and contractors, so no disputes come back to bite the lender.
Sometimes a lender will send out their own independent valuer to assess the project at various stages of construction.
Pre Sales / Off the Plan and Development Loans
This tip is mainly for larger projects, but it’s worth a mention because you might want to move up the chain and try a more significant project after you have some experience.
If you’re doing a more substantial project (say more than three or four dwellings), the majority of lenders will require several pre-sales to reduce their risk profile for the project.
They will usually need around 60% of the dwellings pre-sold before they will cough up any money. This is purely to reduce their risk if the project goes under.
You can’t use any deposits or funds from off the plan sales to fund your project. These are held in trust accounts until the property is settled.
Once you’re at a level where your lenders require pre-sales, you’re probably running a smooth machine, and you should be right.
Although it is worth mentioning, as always, that this is a high risk and high return game. But with no risk, there’s no reward.
A List of Things a Lender Considers
Finally, we’ll look at another aspect of property development loans Melbourne.
This is a list of all the other things a lender will consider about your project when determining risk levels and whether or not they will loan you funds.
- The zoning – inner-city or suburban residential is safest. They might loan you less on rural or regional land
- The end value. You don’t want to price dwellings too high as the bank will consider if they will be too tricky to sell
- Small dwellings. The days of shoeboxes are gone. Banks don’t like tiny apartments. Stick to townhomes.
- The final sale price. They consider this because they need to know what they can claw back if you default and they take possession of the dwellings.
- The suburb. Know your areas. Banks want to loan against high capital growth areas and in densely populated suburbs where buyers want to live.
There you have it! A comprehensive guide to property development loans Melbourne.
As always if you have any questions or want to know more about this topic call our friendly project consultant team here at Little Fish.
We’re always happy to have a chat and discuss our development management services. Call us on 1300 799 277 for a no-obligation discussion.