Hi all,
I have a question regarding finance for a townhouse development. I’m basically trying to find out how much of my own cash I would need in order to meet the required LVR. The development would involve demolishing an existing house and building 3 townhouses. Let’s say the construction cost is $650k and the purchase price of the initial house is $550k, so total project cost is 1.2mil.
Would I be looking at a commercial loan for a development such as this? If so, what LVR would I likely be looking at?
This would be my first development project, so I am assuming the banks would look at this negatively and could possibly effect the LVR that they would be comfortable with?
I’m basically trying to determine roughly how much cash/equity I’d need for this type of project.
Thanks guys!
Hi Rob,
Not a broker so I'll leave the ins and outs of finance to someone more suitably qualified.
One common theme running through many banks at the moment is the need for 'pre-sales' – with 50% pre-sales being reasonably common.
3 townhouses only…stick with residential, you don't need to go into the commercial side of things.
Residential =
1. Better LVR – Btw 80-90% depending on lender
2. SImplier – Standard consturciton loan with 5-6 progress payments
3. More flexibility and control compared to commercial – for small projects like this one anyway
4. Better rates = from 5.80% – 6.15% variable
5. Better conditions = No presale required if you can service end debt.
6. Financial cheaper to keep the property = 30 years term, with good rates
Hard to give you a solid answer without knowing the location, zoning, strategy ( strata title? ) financial details and strength etc..
But generally speaking with a 3 townhouse build, lenders won't look at past experience too much, they will be focus on the LVR, your asset Postion, the fixed price contract and who the builder is.
Here are some softcost you will have to consider on top of your 10-20% deposit.
+ Stamp duty ( roughly $34,000 (VIC) depending on state..
+ Demolish cost
+ Council approval
+ Section 94/ Contributions
+ Connections
+ Furnishings
+ Selling cost ( agent)
+ Contingency cost
Regards
Michael
Mick C | Shape Home Loans
http://www.shapehomeloans.com.au/
Email Me | Phone MeSame Banks. Better Rates. Served With a Passion.
Hi Derek and Michael,
Thanks for the responses!
As Derek mentioned, I would be expecting the need for pre-sales to meet the lender's requirements. Just wasn't sure if I was able to get finance under a residential loan, although it sounds like i should be able to.
The finer details of the project would need to be looked at by a broker to give me a more accurate answer i guess, but i was really just looking for a general answer to a general question, so thank you! The other expenses you've mentioned have been allowed for in the project feasibility, but always good to be reminded of things to allow for!
Cheers guys
Rob
Hi Rob
Course one thing you need to consider is what the land value will be once you know the existing house down as lenders will be concerned as to the lvr both now and pre- construction.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Hi Richard,
I did have that in the back of my mind, but just to clarify, if I initially purchased the property for $550K with a 90% lend, when it comes to knocking the house down, the bank would be asking for some money from me (or lend me less money for construction) to bring the LVR back to 90%? If we say the land value is $450K, they could potentially ask for $90K (or thereabouts)..
Not sure if I've got that right..
Cheers,
Rob
Hi Rob,
One thing you need to understand, if you are looking to maximise your borrowing potential is the difference in the way valuers are instructed depending on whether you ask for a residential loan or a commercial facility. A resi lender will order the valuer to value on an "as is" basis, which means if there is no house you get a lower valuation and the permit or development potential is not taken into account. For a commercial construction loan the lender would order a "Project Specific Site Valuation" this basically takes the end value of the project you are proposing, discounts the costs and what they consider to be a reasonable profit margin (were you to sell the project – note "project" not land). If the project is very profitable you will almost certainly get a higher valuation this way, the lender will use this value as an input cost into the project and will typically lend the lower of 80% of costs and 65% of end value (n.b. the new loan will of course have to be sufficient to pay ouyt the existing loan as well as the construction costs and interest if you are looking to capitalise.
I hope this helps.
Hi Alistair,
Thanks for the info! definitely a lot to consider. Obviously with a higher valuation, there might not be as much difference as I'd thought with regards to how much cash/equity I'd need, even with the LVR being lower for a commercial loan (as the valuation would be higher)
I am basically trying to determine which path to take with regards to developing a particular property. I have the option of either demolishing the house and building 3 townhouses, or retaining the existing house and building at the rear. Both scenarios are profitable, but the 3 townhouse option is more lucrative. However I need to know how much cash or equity I'll need, which may determine which option I choose. Hence the purpose of this thread.
I might have to sit down with a broker and go over the numbers in order to reach a decision..
Cheers,
Rob
Hi Rob
Yes you have it about right.
As Alistair has pointed out a Commercial valuation can be assessed differently all things being equal but of course it is going to come with higher set up costs, interest rates etc.
Balancing item of what works out better for your particular case.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
I guess, that would definitely need a hard time of thinking. Given the options you have, I think it is way better to have an assistance with people who are expert in that particular situation. All I can say is, one must remember that investing threads a crucial path so as much as possible, mistakes are not welcome. I bet, no one would want to fail especially when financial factors are at stake.
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