What is Development finance?
Generally, it is financing for residential, commercial, and industrial property developments. This can include construction projects. Often there is a loan that contributes towards land purchases and a loan in staged payments for development costs to build.
How to fund your next property development
When seeking guidance on property development finances it pays to get all your initial questions sorted up front. Once you have the ball rolling and have a few home purchases under your belt you might seek to look at larger scale developments. Whether that’s looking for long-term passive rental income or a need for putting your dollars to work there is a solution that can be certainly a lot easier. Going over some helpful steps can set you in the right direction from the very beginning.
With 22 years in the game, it’s fair to say that we have dealt with our fair share of development scale projects. We can get your options laid out for you in terms of equity and get the development moving. Whether that’s looking for property development that includes multiple units, commercial and retail projects, or subdivisions Global Finance has been there. Each project is unique in requirements, but we want you to be assured that there is a solution for your unique property development requirements. As each project is different specific levels of funding will differ at each stage of development.
Steps to get a footing on property development
For people looking at ways to increase their passive income they may want to look at demolishing an existing property and putting 5 or 6 and, in some cases, even 8 properties on their section. With the right positioning you can get funding for your development project
First Stage Steps
1) Attain land – In line with current housing changes settlement on land is around about 30-40% deposit needed. Good Starting point is around 30%. It is always good practice to have a little extra to be on the safe side.
2) Resource consent – Can take anywhere from 6-8 months. Depending on zoning this changes the number of properties you can build on it. How high you can develop. You can get a planner, or an architect involved that can lead the resource consent process for you.
3) Building consent – Potentially take 2-6 months. During this process you could be looking for the main contractor. Usually, dependant on how good the building plans have been drawn up as these outlines all the details, if the council can see that these drawings are very clear and clean you might be able to get that turned around much faster.
4) Construction – Once the building consent is issued you can start construction right away. This can take usually anywhere from 6 to 10 months depending on the complexity that you are building because if it’s on a slope or maybe a long driveway it’s going to take slightly longer depending on how many houses you are building.
30% Deposit
–In general for a development project like this you would want to have around a 30% deposit on the total cost of the project. The deposit requirement changes from lender to lender and project to project.
Property Development Example
On a $2.5million dollar project then you might want around $750,000 in equity. This is equity on your property or $750,000 cash.
LVR Capacity for development loans is generally reflective on the number of developments you are looking to construct. For instance, larger numbers of dwellings on the land you intend to build on is reflective of borrowing capacity the lender is comfortable with. In essence the larger the quantity of dwellings, the larger amount of deposit is required.
G.S.T
A key thing to note is that you must also account for G.S.T. Claiming on building expenses also means accounting for it at the other end on completion. Lenders fund on G.S.T exclusive amounts just bear that in mind when you are working out your development project calculations.
Two ways that you can fund a development project
Build to hold – What this means is that when you are done with the construction you are keeping the building and you are renting them out as investment properties.
If doing this type of development, the bank assesses your situation like they would if you were buying an investment property. In this way they would use the future rental income as part of the servicing.
One key difference with a construction loan development to hold is that they will need an extra 15% contingency in your borrowing power. So, for example normally if you can borrow $1million dollars for an investment property.
This situation you will need to borrow $1.15 Million this is to mitigate any risk of cost overrun. In this way the lender is more comfortable because you have a little bit of contingency in there.
Build to Sell – This funding you may be selling all or some of the newly constructed properties. If you are not holding onto the finished properties, the lender cannot look at your expected return as far as rental income is concerned but they will look at your pre-sales. So, no income calculation is considered. A floating rate is usually given until construction has been finished. The lender will look at how much you are needing. Bear in mind that this is comparative to the time you intend to build and how much the lender is willing to fund based on market circumstances.
They will look at the Off the plan sales. All in all, the developer sells the properties before even construction has taken place.
Is it right for you?
If you want to know what different options you might have for your development, talk to a mortgage adviser at Global Finance it’s an easy way to check out how you can make progress.
Make better decisions on your property investments or development opportunities you can contact Global Finance 09 255 5500
**These are general guidelines and are by no means a reflection of bank or lending policies