Financing a Property Development
Property development is becoming an increasingly common investment opportunity. But with property development there are increased risks to your investment. It is a longer, more cumbersome, more expensive road to take, often with higher rewards.
Property development refers to any extension of your physical property. It could be an indoor renovation, the building of a granny flat, an extension on your home, or even building the first structure on an empty block.
Financing a property development can be a mammoth of task. Especially if you are looking to buy an empty block and build from the ground up. Hence, here is a breakdown of your options when financing a property development.
Major Loan Potentials
Each stage in the development process can have a different associated loan. The three major loans you can look into are:
- Development Loan – a loan that applies to the costs of buying and pre-development costs for a piece of land
- Construction Loan – a loan towards the actual construction costs of the development
- Investment Loan – funds towards holding the property for extended investment
Typically, a development loan is the one to start with and can be bundled up with a construction loan to cover between 60 and 80 percent of the total cost. This is cost from buying the land to developing the entire project.
It actually works almost the exact same way as a standard home loan (but with more paperwork). As with most home loans you can borrow between 60 and up to 90 (higher in some exceptions), a development loan is very close to this. You are still expected to put forward a certain level of equity, often between 20 and 35 percent.
Submitting for your Loan
Probably the most arduous part of receiving a loan is the submission and approval process. For a normal home loan, there is paperwork, but it is relatively straightforward.
However, development projects require projections that are much harder to aggregate. Hence, you will need a feasibility analysis and detailed report on your plans and expected costs/returns. Here is a quick list of what you should need.
- Land details – local zoning rules and explanation of the current status of the property
- Form of development and the overarching concept – building a house, extension, direction, changes etc.
- Price breakdown – primarily cost of acquisition of site and cost of development
- Estimated returns/sales value
- Breakdown of time needed – when will certain key milestones be achieved
- Financial position and required loan for the developer
- Credit history, general report on stability of developer
Lender Valuation Approval
Once your submission has been filed, the lender will take due diligence to ensure your report is up to scratch. Unlike other loans, the validity of your projections will be discreetly assessed.
In most cases this involves background checks, detailed discussions and a valuation.
The lender (often at your cost) will hire a valuer to check out the property and your description to ensure that what you say is up to standard. From there, they will consider the loan.
Hopefully this has been beneficial to in understanding financing a property development. Good luck in all your future investments and development projects.
If you do want to know more about selling your home in Canberra or other property advice, take a look below.