Hi everyone,
I really appreciate the level of professional advice on this forum and am hoping you can help me with my project. I've purchased 1,150sqm of land in Boronia, its in a DDO7 zone which allows for 3 level developments. I was thinking of building a few townhouses as this is my first development, but highest and best use of site would be for 3 levels of apartments. My options are:
1) Get plans and permits for 18 apartments and sell site
2) Develop apartments once plans are approved
3) build 6 or more townhouses
I've commissioned an architect to have a look at the site and options. I've started preparing a budget for this project and was hoping someone may have done something similar and could help me with estimated costs for pre-build (surveyor, town planning, soil tests, etc), construction, infrastructure, landscaping, etc.
Also, how banks would lend on this sort of development with pre-commitments before building commences.
Any thoughts would be greatly appreciated. I know doing apartments is high risk for me since I don't have any experience but before I write it off I'd like to make sure that I've exhausted every option and considered any thoughts you may have on it- nothing ventured, nothing gained!
Thanks in advance!!
Well can only comment on the information given because i don't know you exact financial position
But if you were committed to building 18 apartments it would depend how many your selling and how many your keeping and to what the cashflow is after the completion to how many presales the bank would require.
General rule the higher the LVR you wish to get the greater number of presales the bank will require to feel 'safe' and they might not let you include presales to yourself/other entities as presales. ie you bought 6 in 6 different trusts that you wanted to keep after the development.
Your LVR could be anywhere between 50% to prob 65-70% of on completion valuation.
Your equity position and income would also have to be quite high to support a interest only development loan. 18 units even at 135k per single bed unit is still a plus 2 million build cost. Usually plus 1 million means the LVR comes down 5-10% off what they would lend under 1 million.
I like your option of obtaining permits and reselling.
this requires less capital but still to get council planning approval requires for 18 units at least 15k.
Are you sure this is what is needed in the area. You could be building a bunch of 1/2 bedroom units in a 4 bed family type area. If similar developments near by then there could be demand.
Your option of building 6 townhouses could the easiest option to make a good profit and also the easiest to finance especially if they were all separate dwellings (ie 6 townhouses with no joint walls).
If you are low in equity, you could commence the subdivision phase after council approval and split the block up into 6 individual titles before commencing construction using the increase in equity to fund the % required by the banks. 6 townhouses completed after subdivision could be done as residential. If you did it at the same time building/subdivide most likely would be commercial lending but at residential rates. up to 80%
Prob adds 6 months to the length of time to subdivide first expect 18 months from start to finish .
soil tests would be like 1k-2k Max
landscapping well depends on how much you do and what mature plants you use. but a landscapping plan could cost 1k
surveying for the initial subdivision could be 5k
then you have the government charges and water charges
if they are all strata/community titled then i would expect around (and this is rough average from other community titled developments ) 10k per home for the water, sewage and open space contributions.
Thanks Wilko1, I would sell most of them, maybe just keep one or two. I'll would prefer a high lvr at current interest rates and may need to pre sell more. There are a lot of units being pre sold in boronia at the moment so there is demand for 2bed apartments. The units would be a more feasible option and require less equity. You've given me food for thought, thanks for the costings too…any idea what it would cost per apartment to build 2 bed medium quality apartments?
By current interest rates you mean 5%. Usually development loans they will put on 1.5% on top of residential rates. And sometimes a 1% (can be more) application fee of total loan. So so on 3 mil would be 30k.
Do have to have deep pockets to jump straight into a 18 unit development without prior experience.
Just on unit rates for sqm. Medium quality apartments would be around 1400-1500 dollars a sqm. So 75 sqm looking at 112,500 a unit. But I would say a turn key option to be more around the 130k-140k mark once you count the yards, letter boxes, landscapping, parking spaces, stormwater, garages if required.
Hi Wilko1, my pockets are not very deep
which is why I wanted to consider whether this option is worth the risk given its my first time. If i build ill definitely need to raise some equity.Thanks for the interest and build cost estimates. Once I get plans approved and units 70-80% presold. It is only then that i would consider building. Hopefully i can reselll even at that stage.
If i then chose to build I’m taking on a building risk so I’ll need to find a reputed builder. There is also the risk of the apartments not selling/settling or fetching my required price – so far the apartments in the area are selling (seems to be mainly as investments and also by downgraders and those looking for a cheap home option). Anything will sell I guess at the right price, which is why I’ll need to have enough contingency in my budget.
Could anyone recommend a reputed builder and finance broker I could speak to?
As a first development, 18 units is far too large and with limited capital you would likely get yourself into trouble.
Even if you were to get a DA approval and onsell the project, you still need to ensure that the profit margins stack up for the eventual developer based on the design that you get approved.
In this scenario, you still need to be very diligent with your feasibility and make sure that there is demand for the product that you would create. I have seen many DA approved sites, where the original owner has spent tens of thousands of dollars to end up with plans that have no profit in them at all.
I have created a very simple development profitability indicator which is a starting point to determine if an opportunity is worthwhile pursuing further, which you can download for free at http://www.smalldevelopments.com.au/store/show/free-development-profitability-indicator
Cheers,
Matt
Thank mattnz, I’ll check it out.
Getafix
Hate to say no standard lender will touch the deal if this is your first project.
Pre-commitments are no use you would need actual pre-sales with 10% deposit being held and then on that basis such deal would be private funding only.
Wilko's interest rate recommendation i have to say is dreaming in the current climate and you would be lucky to get such a deal away at circa 8% + especially if there is any need for Mez finance when you could be looking at double that.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Thanks for your comments Richard. I’ve spoken to a big four lender. The commercial lending relationship manager said:
– they would fund the project based on my model which was conservative and tied into her estimates. I told her it’s my first project and it wasn’t an issue.
– lvr 80% of cost and 65% of gross completion value
– presales of 50-70%
– line fee 1.75%, margin bbsy +1.75% – so all up rate of around 6.15%
– establishment fee 0.75%
So much closer to Wilcos estimates.I’m meeting up with her next week to firm up my lending estimates. I’ll check with her again to make sure that I can still get finance even though its my first time.
Hi Getafix,
One thing you have to understand is that there can be a big difference between what a relationship manager says they can do and what they will actually do. The %'s you quoted are not the policy of any of the majors, although they are closest to what ANZ can do. ANZ would require 75% debt coverage with presales, I suppose this may end up being 50% – 70% of the units, but the presale requirement should always be quoted as a % of debt coverage. All other majors require at least 100% debt coverage. If you get a permit for an apartment development and it is ANZ you will most likely be declined based on both your lack of experience and if you do not have a strong balance sheet outside of the project, regardless of how good the project is. If you are building townhouses you will probably be ok.
Thanks Alistair, you're on the money – it was ANZ that I spoke to as they are my current lender. Sounds like I definitely need to do a lot more work on the funding piece and speak to a few other lenders. I've got other equity partners that will come in on the project so I hope this will help the project.
If I was determined to go ahead with the apartment option what do you think it would take for the banks to lend?
No problem. Depending on the size of the development you end up doing the file may be dealt out to a property finance specialist within the bank, it certainly will if you are building 18 apartments, they have different policies with regard to things like the balance sheet of the borrower than a regular relationship banker. Your banker's advice is probably correct if the scenario were to sit within his portfolio, but the thing is it probably won't. You also need to recognize that very few bankers are much good at processing development deals so the feedback you have received may also be just plain incorrect. The things you will need in an equity partner are that they have a substantial net asset position and experience with the sort of development you are looking at, if they tick these boxes then get their input early. It is not a matter of the more dwellings you can get on the site the more money you will make, it will be a trade off against number of dwellings, the price you can get and how salable those dwellings are (apartments don't sell well in every location as an example) and the cost of building. Things like lifts and basement car parks add significantly to build costs and it is is often the case that it is more profitable to build a smaller development to avoid such expenses. Good luck with your site, development is a great area and I'm sure you will do well out of it, just go through it methodically and make sure you get good advice on all areas of the process.
Another thing to do is do a joint venture where we can come up with some investors for you that make it far easier to get the finance
Nigel Kibel | Property Know How
http://propertyknowhow.com.au
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Alternatively contact Alistair and get him to assist you in financing the deal for you.
Never goes a miss to get someone with extensive development financing experience on your side whether it be your first or 21st project.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Thanks guys for the feedback. I'm meeting with Anz tomorrow and got a call into cba so ill definitely follow up on the great points you've raised.
You are probably wasting your time speaking with CBA re this project. Firstly, because you will almost certainly be building more than 5 dwellings they will apply an 20% "in one line" discount to the valuation, they will quote a max loan amount of 70% GRV (Net of GST), but post the discount you really only get 56%. Is worse though, if the loans over $3 mill they will require you have 50% equity in the project. Financing the construction s a long way in the future anyway, you need to maximize the profitability of the project by designing and getting approved an appropriate design for the development.
Hi Getafix,
I have now developed over $50M worth of property over the past 8 years (including 1 large $23M) and can offer this advice:
There are many skill bases you require before even contemplating development, especially one the size you are considering. Some of these can be summarised as follows:
Negotiation Skills (Most important)
Design Knowledge (Equally Important)
Market Knowledge – So a unique product may be created and released into the market for sale/lease with multiple exit strategies to explore if things don't follow plan (which the rarely do)
Building and construction knowledge
Knowledge of Law
Knowledge of Finance and Accounting
Knowledge of Marketing
Town Planning/Environmental Law knowledge
These are the very broad areas of knowledge you require as a bare minimum before you would consider "diving" in. So many people think they can outsource all the above by engaging consultants, and that they will just "take care" of your interests. This IS NOT the case, unless you have the knowledge and skills to drive them in the direction the project requires in order to achieve a favourable outcome. The most dangerous thing you can do is read one of the many generic books on the market that brush over the core skills required and make you believe you can do it on your own. A seasoned, skilled developer (like any professional) gains their knowledge and skills over many years, if not decades. Lastly on this point, if you don't intricately know anything about a particular discipline of a development, how can you go and hire of engage the correct professional to fill that void? What questions do you ask to ensure they are the right person for the job? How do you know what terms to include in any agreement that is to be executed with the consultant?
The other thing to consider is that when undertaking a development as a one off, you are unable to spread your overheads across multiple projects, which in effect make the exercise unviable. For example, a construction contract (prepared properly) will cost around $15-20K, a sales contract will costs around $2-3K alone to have prepared etc etc etc (I could list the fixed costs for various expenses all day) If you look at these costs as a percentage of the total cost of an 18 unit development vs a 100 unit development, it quickly adds up to ensuring the project isn't viable.
In summary, setting up all of the infrastructure to run 1 project as well as making all the mistakes along the way that you will inevitably make as a result of inexperience will ensure the project fails financially unless the market booms to cover all your mistakes. No business in the world succeeds by outsourcing every skill required to make it a success. You simply have no control over consultants and are at their mercy at all times. You can't run to the courts and take legal action against a company every time they don't perform and if you withold payments, you end up spending more money on legal expenses whilst the lawyers engage in letter wars.
If you think you want to be a developer, start with a very small, lower risk reno to see if you can make that a success (your 6 town house project is way too big to start with too) You will learn how to deal with councils, contractors, agents etc etc by doing this and then be in a more powerful position to decide how you proceed with this property (other than asking others on here what to do, that quite frankly, in the majority of cases, have probably never engaged in a development before either)
Anyway, good luck with whatever you decide. Your situation is a common one, and if you do some research you will find that construction/property services have one of the highest failure rates of any business sector.
So what I am saying is that you will answer your own questions as you become more sophisticated and gather more experience.
Quite frankly, you will be far better off investing in areas with very sound investment fundamentals and holding onto the properties for 2 property cycles. This is how real wealth is created. Unless you are planning to become a developer as a career and planning to do everything you can in order to succeed, the odds are very much stacked against you. It's no different to me taking a course on heart surgery and reading a few books on how its done and deciding I want to do a heart by-pass surgery in a few months. To become an expert at something, you need to spend 10,000 on it.
I could write much more about the very basic necessities of what are required to be successful in development, but you can contact me if you want to ask anything further.
Dave Ward | Geronimo Finance
http://www.geronimofinance.com.au
Email Me | Phone MeProperty Investor, Property Investment Expert & Advisor, Finance Expert & Strategist
I totally Agree with Dave Ward..100%..
I own an investment property and was thinking of building townhouses on that BUT after the research I found Better off just do some cosmetic renovation and hold the property as long as I can to create real wealth.
Real wealth is created by holding properties long term..
Good luck
which is why I wanted to consider whether this option is worth the risk given its my first time. If i build ill definitely need to raise some equity.
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