Hi all,
Wanted to get some forum thoughts on my plans and how I might accelerate them.
I've purchased an existing house on a large block of land. I plan to subdivide and build 2 units out the back. Approvals shouldn't be a problem, however I'm trying to work out the best and quickest way to finance everything going forward.
Basically my plan is to draw equity from existing IPs to pay for the initial up-front fees (planning etc) since I'm told I can't borrow for these. If my equity isn't enough, I will have to chip in my own cash.
I then can borrow up to 90% for construction, meaning I have to fund the other 10% myself. Now say build cost was $500K – this means I need to fund $50K out of my own pocket plus say another $50K for contingencies.
So my issue is how to come up with this $100K. My plan at the moment is to revalue more of my properties in a year and combine this with savings to come up with this amount.
I'm hoping there may be a quicker way or some technique I'm unaware of to allow me to start a bit earlier. Can I somehow leverage the increased value of the land once the permits are approved? (Let's assume they'll be approved for the sake of this post!)
All help appreciated, cheers!
Yes that is one way to do it.
The smarter way would be to get your plans and building approvals through council first.
Then once you have done that source a few quotes for the building of your 2 units out the back.
Lets say we will use your example of 500k for the units although unless they were double story i would say 250k a unit is a bit over the top.
You then go to a bank that will give you a upfront on completion valuation on what the dwellings and original house will be worth on completion. ie the total net worth of all the dwellings combined and this will be based on like sales for similar houses in the area.
lets say the valuation came back in at 1.2 million – original house 300k, unit 1 450k unit 2 450k.
Lets assume you have a loan on the current property of close to purchase price or 80% whatever you choose say its 400k loan.
Tentative on completion finance allows you to borrow up to 80% (sometimes 90 although rare) of the final value of the project which in this example is 1.2 mil.
Your fixed price build contract with your builder is for 500k and you have a existing loan on the property of 400k. Therefore your total debt is 900k (assuming you did pay planning fees out your own pocket)
the bank will lend you 80% of the final value of 1.2 mil. which is 960k.
So your debt ratio would be 1.2mil/900k = 75%. which would be under the 80% required.
Also is that once you complete the project provided your serviceability will handle it they will forward the remaining balance to you as well so on handover stage you can get a extra 60k in your back pocket as well until you either sell or do something else with it.
if you plan to rent the units the unit rents will be counted towards working out if you can service the debt
if you put some approx figures of your buy price, approx build cost, approx sale/value of the end units and house after losing its land etc could see if your situation adds up
Thanks Wilko. A nice post with a helpful example! Your numbers weren't actually that far off!
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