Forum Replies Created
Cheers Maurice (and also glad my question the other week helped someone else! ).
Thanks for the explanation Alistair, I too am interested to understand the nuts & bolts of finance for development projects.
Adding to the discussion already can you (and/or others) confirm if my understanding is correct (many thanks in advance).
With commercial finance through the banks there are two basic options: either borrowing up to 80% of the total project costs (which includes land purchase price, soft costs and construction costs), OR borrowing around 65% of the Estimated end sale price of the project. Is this understanding correct?
So if you were going to apply for commercial finance for a block you’d already purchased and had gotten plans/permits for. Then working backwards the banks look at the project as:
End Sale Value of all units
– costs to develop
– margin of profit (looking min of 20%)
= Value of the project (ie value of the land).
You then compare this value of the land to the price you paid and there should be equity in there. It’s this equity that forms part of your contribution to the financing of the project & it can be enough to loan you 100% of the construction costs. If it’s not enough you’ll have to chip in more money.
Is this a correct understanding of things for that type of scenario?
If the project was for a larger development (say more than 3units) and the initial land acquisition price was quite expensive (making the use of residential finance difficult to obtain as serviceability issues on the loan would be tough), would a common approach be to use commercial finance for the whole project? If so would you submit the application for funding in one go or would you still apply for the purchase of the land first, then go away get the permits for the units done and come back and apply for the construction phase?
Thanks again for your time and comments,
JennyCheers for the clarification Terry. I have also picked up my copy of "turst magic" and am re-reading it to help me. Thanks again!
I have no development experience so others may correct me here – but I think I understand your question.
After talking with some commercial lenders (just from the Big 4) they need a project to show a 15 – 20% profit margin (so profit margin = profit / (total expenses)) before they will lend to it (other factors will of course affect things but that's one criteria).
In this market one lender commented he's seeing more projects at the lower end of that scale with only 15% profit margins coming across his desk.
In case this kind of info is state sensitive – I live in Melb.
Cheers.Do you have any credit cards, store cards, personal loans, car loans, etc that could be paid off with your $60k savings?
No store cards, no personal loans, no car loans and only 1 credit card with a $1,000 limit (current balance = $0 ).I will look into a reno for one of the properties (it's an older unit and would therefore benifit as you say by getting more rent), the other properties are all in pretty good nick.
Cheers again for the comments, I will go back to the mortgage broker see what other lenders are out there that may help.
Richard I might send you a private msg with more details if that's ok.Hi Mike,
Very much appreciated the prompt reply and the report. It's going to help a lot
May your generosity return to you two fold.
Thanks again, CheersThx guys, I never thought about putting the cash into an offset account.! thanks again.
Thanks everyone for your throughts, much appreciated.. jsut one comment:
duckster.. you said it would be hard to see how this would work since the property market is not booming, can you explain the senario how it works when the market is booming.cheers
jxfThanks Terryw and Mortgage Hunter. Your explanations have cleared things up a lot! My main hesitation with what I understood about IO loans was the idea that after the interest was paid (in a short term say 5years) you had to pay up the lump sum of the principal. Your comment that there are loans that can be interest only for a period of time then divert to interest and principal is interesting. Since I am looking at holding on to my investment properties for many years I was initially not sure IO loans were for me but with the other option you described my eyes have been opened!
I have one more question… SORRY!
Going back to the cups catching rain analogy. Is it better to have a few large cups or lots of small cups to catch the rain. By that I mean is it better to by lots of cheaper properties (say properties in regional locations at about the $100,000 mark – which can be easier to positive geared). Or is it better to have only a few houses in the already substantiated suburbs? (So places worth .. roughly $250,000 plus).Cheers for your viewpoint.
jxfG’day all
I am also interested in finding out what these Interest Only loans are all about.
Simon (Mortgage Hunter) I go back to your example of your parent’s place.
So they paid interest only (hence their mortgage payments were smaller each month) and now they still owe the initial borrowed sum of $47,000. Will this sum then be paid out when they sell the property? Are you under any time frame to come up with this sum or will the bank just wait until you want to sell it?Now, if they had paid Interest and Principal does that mean they would now owe $0 on the property – so the full $3Million would be theirs? (ie you don’t have to subtract the $47,000 from the $3Million if you sold the property). But by paying interest and principal over those years the draw back was paying a higher mortgage payment each month which then (could have) meant they didn’t have as much cash lying about to finance other investment properties.
Is this logic I have applied correct? Is it a too simplified view to such a situation?
If the logic is on track….are we talking the same time frame for each of these scenarios? That is will you pay off all your interst only loan in the same years as you would an interst/principal loan – assuming you stuck to the minimum payments. If not which is quicker and why.Another question if these scenarios are vaguely right – isn’t it better to own your property outright at the end rather than still having to pay off the initial borrowed amount?
Also do you still choose if you want a fixed or variable interest rate for interest only loans? If so which is better – or is it a case of looking at what the market is doing and trying to pre-empt a drop/rise in interest rates.
Sorry for the overload of questions! Just trying to get the terminology and different options out there under hat!
Cheers
jxf
