If you are interested in maximising a single piece of land by building a small residential development rather than one freestanding dwelling, you need to look into a property development loan.
Larger projects such as multi-dwelling residences, small office buildings, retail shops and skyscrapers require commercial property development loans, unless you’re building less than 4 dwellings then it may fit into a residential home loan.
Residential property development loans are different to a standard home loan.
As you embark on your property development journey, here are the three main steps you should prepare for.
Step One: Planning For Property Development Projects
During the first stages of your preparation, you’ll need to conceptualise what exactly it is that you want to do.
Here are some things to consider:
- Do you want to develop a duplex or townhouse or multi-dwelling properties?
- Do you want to sell all of the properties upon completion?
- Do you want to rent all the properties out and receive a monthly rental income?
- Do you want to make one of the units your residence and rent out the remainder?
- Do you need to pre-sell some ?
Answering these questions will help you identify where to buy land that is appropriate to your needs.
Next, is planning.
At this point, you may need to seek the advice of a broker to maximise your chances of being approved for your loan.
Begin by considering the following:
- The life of the loan – how long do you want the loan to run for?
- Extra funds – do you have money for building emergencies?
- Feasibility – is there a demand in the market for the development you are planning? What is the profit margin?
- Hard costs – what is the predicted price of labour and materials?
Once you know how much finance is needed for your development, you can reverse engineer how much deposit you will need.
The loan to value ratio (LVR) is the percentage you can borrow compared to the total value of the project once built. Generally, the LVR is 80% if it fits in the residential guidelines and can go up to 65% for commercial development..
Step Two: Development Finance For Your Property Development Project
In step two, you’ll need to research how much you will be able to borrow. Or at least ask your mortgage broker to do so.
If that number matches your requirements, you can begin searching for the development loan that’s best suited for your current financial circumstances and future financial objectives.
It’s widely known that getting suitable funding for property development can be a tricky process, never mind stressful and exhausting. Mortgage brokers have relationships with many standard and private lenders, so they can take on this load by identifying the appropriate ones that offer what you require.
Remember, when it comes to finances, your mortgage broker knows what you need better than you know what you need. Leave it up to them to negotiate the loan with the features that suits your needs.
How Funding in Residential Property Development Loans Works
- Slab stage (foundations)
- Frame stage (base, bricks, roof trusses)
- Lock-up stage (weatherproofing)
- Fixing stage (electrical, plumbing)
- Development application (DA) approval
- Land clearing
- Legal fees
Step Three: Applying for Residential Property Development Finance
Before approving your property development loan, lenders assess several factors, including:
- your development plans;
- your current financial situation; and
- a feasibility study.
Development Project Plans
A lender’s main concern is whether your planned residential development is viable.
To convince them that it’s viable, you need to present a robust property development business plan. This document is your make it or break it moment, so you should consider having a property professional compile it for you.
The elements that should be incorporated into your development plan include:
- the property’s location and zoning;
- what you plan to do with the properties;
- a design concept;
- a timeline;
- the total projected cost;
- how much money you can put down as a deposit; and
- how much contingency funds you have.
- What is your profit Margin
- Who’s in your team, e.g. Project managers, builders and designers.
Current Financial Situation
To provide the lenders with your full story, You’ll need to provide the lender with financial documents to fully assess your financial situation.
They also require full disclosure of your assets and liabilities and whether you can provide any security for the loan through cash equity or any existing properties that you own.
Lastly, they’ll examine your credit history.
Once they have verified your financial situation, they can assess how much you can afford to borrow.
Property Development Finance Feasibility Study
You need to present to the bank how much return on investment you’re expecting. A good way of increasing your chances of getting approved is to prove that you will be able to obtain a margin of 20-30%.
Here are some costs to cover:
- Soft costs
- Construction costs (including materials, labourers, and machinery)
- Selling the property (stamp duty, real estate agents, solicitors)
- Unpredictable overruns (buffer based on market research)
Managing Your Residential Property Development Project
In the case of property development, there are many working parts to create a whole. Unless you’ve done this many times before, it is worth having a team of property professionals in your corner to help you secure your development loan and your development in general.
This is particularly true during the financing stages. By taking the reins, your mortgage broker can free up your time to manage other pressing issues.
Lenders can be pretty strict about development loan applications, so the reward of employing a mortgage broker to oversee this process far outweighs the risk.
The process of taking out development loans include three main steps:
- Identify exactly what it is that you want to do and why.
- Get a brief idea of how much money you need to borrow, and work out how much you need for a deposit.
- If all is in order, research how much you will be able to borrow.
Property development specialists from The Mortgage Agency can guide you through this journey quickly and efficiently. Development loans can be tricky, and we’re well-versed on the topic and can help you reach your property investment goals.
From setting up your development business plan for the loan application to laying the first brick, your mortgage broker will be there every step of the way.
Get in touch with a mortgage broker at The Mortgage Agency to begin your journey today.
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property buyers and investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal, tax or investment advice. You should, where necessary, seek your own advice for any legal, tax or investment issues raised in your affairs.