More property investors in Australia are using advanced strategies to fast-track their wealth creation. One of these strategies is small property development, which comes with potential financial rewards that may even be better than traditional property investment. However, it brings risks with it as well.
Several factors you should consider before starting a small property development project include finance options available for the project and its application process, valuations, risks and mistakes you can avoid.
Property development lending can be more complex than standard residential finance because of its higher costs. There are various types of lending for the different stages of a project such as the acquisition or development loan for the purchase and pre-construction costs, construction loan to cover the building of the project and investment loan for long-term costs.
The development loan is structured in that the lender provides about 80% of the project’s total cost, instead of its end value. The developer is expected to fund the rest of the development. The investor usually has to provide 20% of the funds if he’s building a two-dwelling project and about 35% for larger projects classified as commercial loans.
Larger projects of about $3 to 5 million may have lower LVRs and usually require pre-sales of a percentage of the project, which is often equivalent to the debt coverage. Development loans also offer staged payments to be completed at the end of each stage.
Property development finance applications may be time-consuming and require information including a detailed feasibility analysis which looks at all relevant factors of the project such as contingency funds.
The application needs to state the development type, site description and zoning, design concept, land and construction costs, projected sales figures and profit margin, timelines until completion, the developer’s financial capabilities, available equity and development track record or experience.
You should establish networks and a team of professionals to help you prepare your DA and work with the council. For property development finance, a valuer will be appointed and will look for potential financial issues that may disturb the project.
The valuer will also review the feasibility study and look for any missed expenses, including holding costs, taxation liabilities, and selling and agent costs even if the project is not intended to be sold. Lenders want to see at least 15% of projected profit.
Make sure that you have realistic expectations and don’t overestimate. Understand the market conditions when the project is complete and be conservative with your valuations. Note that cross-collateralising projects may also cause many problems when you have to discharge the construction loan.
What can you do during this period?
It is important to seek professional advice in navigating the different market conditions in Australia. Chan & Naylor does not sell properties so it remains unbiased. We would love to help you whether you are a beginner or seasoned property investor.
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