HI all.I need a bit of help. I am wanting to purchase an investment property costing $260K( an old house to be knocked down which sits on 2 already divided lots). I need to move quick in the next few days if I am to be successful in buying the house, as there is lots of interest, as it is a bargain. I need to then borrow an additional $150K to further develop the property(this includes solicitors costs, RE fees to sell, finance costs, stamp duty etc etc), and then resell. I have been using website calculators the last few hours to see if this is viable and its driving me mad. maybe someone can help me. I only have $20K deposit, my hubby and my combined income from last year is $82300. We have loans of $2316 per month. $7K credit card debt. Income will be $1280month when we rent our family home out to move in with inlaws for 6 months to do the development. We have 1 baby(dependant), and approximate equity of $80000 in our house, and $80000 in a vacant lot that we own also(trying to sell it without success). Is there a way to use the equity to bring down the amount to be borrowed? OR do I need to borrow the $260K plus $150K development cost, less our $20K deposit. I am sure this is an easyquestion for some of the experts here. Is this property development within our reach, and what are the options to finance? Many thanks for any help you can give us. any other advice would be appreciated?
Funds sourced from equity isn't manna from heaven – you are effectively taking this money out from the bank and paying interest on it anyway. You will need to consider how you finance the purchase (without cross-collaterallising) as well as how you will be able to repay the interest on the $390k loan ($260K+$150k-$20k dep) – approx $2k pcm i/o @ 6%.
If you can capitalise the interest on the development site you won't be paying for the interest cost/repayments until you sell however in the current market it may be more difficult to find a financier who will accept capitalisation of interest, this is also a higher risk path esp if you do not make the profit that you anticipate.
Whilst you can finance some of the development costs (with the right lender) you will still need to put a fair amount of cash or equity yourself during the process.
Depending on what you intend to construct on the site will determine who will consider the application.
Also you need to think about the entity you will buy the property in as all of these matters need to be considered prior to gong to contract.
You do not break up your incomes individually and without knowing this it is difficult to comment as to whether you could actually show sufficient serviceability to fund the deal in the first place.
Further information would be required to comment further.
Richard Taylor | Australia's leading private lender
You don't have to "move quick". Relax and take a deep breathe, Lol.
You obviously haven't been looking at properties with a serious intention to buy for a very long time. If you did you would have had your finances sorted out and you would know exactly what you're getting yourself into. Besides, it's not the last good deal to ever come along. In this economy there's plenty more to come. You're better off missing a possible good deal than getting yourself into some very serious financial strife.
I'll second skuz's comment. I've been all excited and went to contract on something that we thought that we could afford, to find the max LVR was different from what we were expecting. Rather than let it go, I tried my hardest to get finance, spending money on valuations on everything we have, and DA before we even owned the place. It wasn't until about 4 things went wrong all in the one day that we exited the contact – losing our spends in inspections, valuations and DA, but not losing our deposit as we exited under the terms of the contract. I'm so glad I got out then. It would have turned into a disaster if I had held on. A disaster that we were mortgaged to the hilt to be a part of, a disaster that could well have cost us everything that we had built up to date.
So don't get too carried away. Stay focussed and objective. Don't mortgage yourself to the hilt on something that you have very little knowledge or experience with. Just because lots of people are interested, doesn't mean that you should be. There are lots of idiots out there. Don't follow them. Now may not be the best time for a beginner to cut their teeth with developing.
Good luck
SWow, sounds like you got lucky and a lesson well learnt. If I was you I would continue looking at things that you can develop and what it is going to take and cost to develop. Most importantly, try and find out how other people have f#cked up. It'll just better prapare you when you get an oppurtunity to do it yourself.
In my planning I am making sure I can get through even the most un-imaginable situations like 10% interest rates, drop in house prices, decline in rental return and have to resort working an unskilled job if I get sacked from my professional position. I wouldn't even consider something if it was a house of cards situation. Especially when everything is so so uncertain.
Yeah, I feel like that now, too, Scuz, but sometimes it isn't until that house of cards is shaking that you realise just how precarious a situation you are in. I have solid management experience and accounting training. To my advantage was a sophisticated spreadsheet which I designed that had all sorts of what if scenarios, and a cash flow timeline. This spreadsheet let me know that the likelihood of the proverbial hitting the fan was increasing all the time, while I was still able to get out of the deal. Every time something changed, I changed the spreadsheet. Bottom line figures started to go below what I considered my minimum acceptable ROI given the risk involved. Worst case scenario started to go into a loss. Thank goodness I had the skills to work all that out as the situation unfolded. Many don't. And I learnt about the things that I failed to plan for, and the weaknesses in my plan. I won't attempt development again unless I can do it in a market with which I am intimately familiar.
S
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