All Topics / Finance / NEED/WANT to capitalise interest to develop

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  • Profile photo of safeashousessafeashouses
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    @safeashouses
    Join Date: 2005
    Post Count: 41

    I want to buy a residential block of land, have it subdivided and either sell one block and move an old home onto the other and sell,or move an old house onto each block and sell each.I have costed this project and estimate that when complete, I would have about 25% equity.

    From what I can tell so far, servicability of the debt would be my problem, and lack of equity. However, with only home equity to go on, I would like to capitalise the interest on the funds until completion ( say 8-12 months) and then refinance when I have added value and created equity, prior to selling.The postcode of the property is 2470. I have been told by one broker that the postcode is a problem in terms of trying to borrow more than 70% LVR.
    Is this aim possible? Can I find a financier to capitalise interest, or is it only for coastal property? What would I need to show?
    Am I dreaming. or do need to find a private financier?

    safe as

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 12,024

    Safe

    No not at all as long as you show serviceability or an exit plan then i am sure it can be financed.

    We finance many development deals for clients and interest capitalisation is important in a lot of these.

    All depends on GR’s.

    Would need to now a lot more information before i could make a call on whether it could be done or not.

    Richard Taylor
    Residential & Commercial Finance Broker
    **Lodoc Commercial loans from 7.39%**
    Licensed Financial Planner
    Ph: 07 3720 1888
    [email protected]

    Richard Taylor | Australia's leading private lender

    Profile photo of safeashousessafeashouses
    Member
    @safeashouses
    Join Date: 2005
    Post Count: 41

    Sorry, but what is/are GRs?

    safe as

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
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    Sorry Safe i shouldn’t have used acronyms.

    GR = Gross Realisations or End Valuations.

    Richard Taylor
    Residential & Commercial Finance Broker
    **Lodoc Commercial loans from 7.39%**
    Licensed Financial Planner
    Ph: 07 3720 1888
    [email protected]

    Richard Taylor | Australia's leading private lender

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,213

    The postcode won’t be a problem with the majority of lenders as mortgage insurer PMI will lend up to 100% there (for full doc up to $400,000) and even 80% LVR there for a low doc loan up to $500,000

    see
    http://www.pmigroup.com.au/LocationWizard.asp

    If you have enough equity, you should be able to capitalise interest

    Terryw
    Discover Home Loans
    Parramatta
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    Profile photo of safeashousessafeashouses
    Member
    @safeashouses
    Join Date: 2005
    Post Count: 41

    Ah, equity. Thanks for the replies; its a weight off the mind knowing that capitalising interest is possible. However, I have had a closer look at the estimated numbers:

    Intended Cost of land when subdivided $75,000
    Value $110000 (each block $55000) 68 % LVR.
    Could try and sell but considered too risky to HAVE to sell 2 blocks in an old area of fibro and weatherboard houses.

    Ok then, move a house onto each block.

    Land $75,000
    Houses x2 $180,000
    Total cost $255000
    Estimated end value $310000 ($155000 each).
    PROBLEM: 82%LVR!
    These numbers DO NOT include any contingency for costs higher than rough quotes nor an interest cost.
    With interest , could easily reach total of $275000. This is too close for my liking, as the local market is slowing and if each house sold for less than $137,500 net, I’m out of the game. I would not be able to afford neg gearing, so the strategy would be a MUST SELL.
    Houses in that area have been selling for $150,000-$160,000.

    Good idea/stategy, but probably a property in an area where end property values are not high enough to justify the trouble (also I would be needing to borrow all the cost).

    Gee, it must require a lot of skill to create equity from nothing. Will have to move further outside the comfort zone and look to another area further from home. Maybe right stategy, wrong area.Can’t fit a square peg in a round hole.

    safe as

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 12,024

    Safe

    90% should be available to you however I guess you have to find your confort level in development.

    You could always buy, develop and hold.

    That avoids that horrible word TAX

    Richard Taylor
    Residential & Commercial Finance Broker
    **Lodoc Commercial loans from 7.39%**
    Licensed Financial Planner
    Ph: 07 3720 1888
    [email protected]

    Richard Taylor | Australia's leading private lender

    Profile photo of safeashousessafeashouses
    Member
    @safeashouses
    Join Date: 2005
    Post Count: 41

    Tax is a wonderful word, I would look forward to paying capital gains tax as it means I have made a real gain and not just a “Paper’ gain that you read about in those property magazines.The tax rate isn’t 100%!
    But the above numbers I am walking away from, its too risky for me as the variables can change and leave me short.

    Do developers usually work with such tight margins, say 10%?

    safe as

    Profile photo of grossrealisationgrossrealisation
    Member
    @grossrealisation
    Join Date: 2005
    Post Count: 1,031

    hi safeashouses
    some do but you shouldn’t a lender won’t lend on a development unless there’s a 20% return and if they won’t lend unless it get to that level, I don’t develop unless it gets to that level,
    simply unless there’s enough profit in it I for one won’t do it

    here to help
    If you want to get involved in some of the projects I’m involved in email to [email protected]

    Profile photo of Stuart MilneStuart Milne
    Member
    @stuart-milne
    Join Date: 2006
    Post Count: 196

    My personal preference in relation development and the developers I know also state the same – if you’re not making 30% after interest and all other costs have been taken into account then it just isn’t worth it. 20% is acceptable if there’s a cost blow out which can happen but thats why you should be looking for the 30%. It covers you in the event of a problem.

    Stuart Milne
    Non-Conforming Specialist
    READY Mortgages
    http://www.readymortgages.com.au
    [email protected]
    Mob: 0404 056 055

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