Finance tips for developing in Perth
Finance tips for developing in Perth
- Know Your Numbers – Complete a property development financial feasibility assessment estimating all costs and the likely financial return for various development options and site locations.
- Experienced Property Development Finance Broker – Whilst you may have previously gone to your bank directly for a standard home loan, there are significant differences between banks for multi-unit loans (e.g. construction loan for triplex). We recommend working with a finance broker who understands the complexities of multi-unit developments and who is up to date with the varying lending policies across the banking spectrum.
- Residential or Commercial Loans? – As a general rule, it will be best to obtain a residential loan for your development. A residential loan will usually be the most economical and flexible solution. A finance broker experienced in multi-unit development finance will be able to guide you through the options available.
- Right-size for your Financial Circumstances – Not all banks will allow multi-unit development loans. There are various residential loan options for 2 and 3 houses on one title, but very limited options for quadruplex projects. Above 4 houses on the one title, the finance will usually be considered a business / commercial venture and a business / commercial loan will be the only option available. Unless your income and/or equity is very strong, then it is best to pursue a duplex or triplex project, as the loan criteria will be easier to meet.
- Finance Pre-approval – Once you know your numbers (see Tip 1) you can work with a finance broker to obtain finance pre-approval. This will still be subject to valuations, but all other aspects of the finance will be approved. It is ideal to obtain pre-approval before signing any real estate or construction contracts, as not only will you be confident with your numbers, but you can also show the selling agent you are pre-approved, when looking to acquire a site. It is also very helpful, to provide your broker with a Preliminary Financial Feasibility Report to ensure that your finance pre-approval is based upon realistic numbers.
- Beware of Bank Valuations – Banks look at valuations on multi-unit developments differently to a normal construction loan as there will often be several dwellings on the same title during construction. There are also differing methods of how banks will instruct valuers to conduct these valuations. Therefore, it is best to understand how the bank/lender will value your proposed unit development. Take this into account when completing your financial feasibility analysis.
- Contingency Funds – Your plans should include contingency funds of at least 5% of the project’s cost to cover unexpected issues … even more if there is uncertainty about valuations!
- Joint Ventures – Completing your dream project as a joint venture (e.g. with a family member) is a great way to raise additional finance. Sure, you need to share the profits, but it’s much better than having a dream that can’t be realised. Make sure that the expectations and needs of each joint venture partner are documented, aligned and agreed, including the future financing needs of each party.
- Understand Interest Charges – During the course of development, a construction loan will be progressively drawn down. Interest charges will usually be required to be paid as you go, so factor this cost into your financial feasibility
- “Yes” does not always mean “Yes” – Finance pre-approval significantly increases the chance that your final loan application will be accepted, but it is not a guarantee (see Tip 6 on Bank Valuations). However, if you are thorough in your planning and due diligence, your property development dream should become a reality.
- “No” does not always mean “No” – Policies can differ greatly from bank to bank, so just because your bank says “no”, does not mean another bank or lender will not approve your project. If planning and due diligence have been thorough and you are working with a finance broker knowledgeable in multi-unit developments, the chances of a “no” will be significantly reduced.