4 lot subdivision and building loans

Hi All,

Sorry if this is long! Here's my story and questions regarding how much I can borrow, with the intentions to build 4 top quality townhouses/houses (what's the real difference here?) on a large block all at once. I want to avoid having to sell any land in order to do this.

1 Apr 2017 - Bought 1350sqm property in eastern suburbs of Melbourne with allowance for subdivision into two lots. Paid $965,000. Borrowed $772,000. (suspected laws were about to change to allow subdivision into 4 but it wasn't announced at the auction officially yet). Property is across the road from train station, 350m to supermarket and main street. Block is slightly sloping and long and did have an unliveable 1940s weatherboard house.

3 Apr 2017 - Laws changed allowing me to subdivide into 4 as long as I had enough garden space. (instant equity gain?)

July 2017 - At settlement, agent who sold me the property told me that if I subdivided into 4, each could be worth around $500k-600k. Not a lot of land for sale in the area, and a brand new shopping centre is replacing the coles/aldi/dingy shopping centre in a year's time that's approx 350m away. (note: I have not had a proper valuation done on this. Not many lots go up for sale in this area, usually just backyards in odd shapes, and we have arguably the best lot in this suburb as far as location for a rental subdivision)

Sept 2017 - Did minor renovations myself to make house liveable and rented it out. I don't expect this to up the value of the property at all, it was just to help us with interest repayments and tax deductions.

May 2017 - Have not yet put application in for planning permission as we've been busy with other things this year but in the meantime, saw that a property sold in Aug 2017 for exact same square footage, but its more of a square block in a court, 1.8km from the station (compared to our 20m across the road) and shops, and house equally as dated as ours. It sold for $1.23m.

Units/townhouses are selling for $700k-1.2m in the area depending on quality, and the house next door to ours with only 1000sqm on a square block with a large old weatherboard house on it is up for sale for $1.25m.

Here's what we want to do: We have a combined income of $161k, and we have $90k of savings in an offset account. A close friend who works on the council and very familiar with subdivisions told us to set aside 100k roughly for the subdivision. We plan to subdivide, build, then rent out and hold for the long term and use the equity to start more projects like this. We want to build high quality houses (as HQ as we can afford) so we're thinking $400k per house. If we take the low estimate of the lots at $500k each, and have a $400k house sitting on there, I think we could get somewhere around 1.1-1.2 million for each if valued.

Originally the plan was to use the 90k (soon to be 100k) to fund the subdivision, then revalue. We'd have about $2m worth of vacant land, with $772,000 in loans. We'd then need to borrow $1.6m to fund the build, because apparently it's better to build them all at once... I hear it's not a good idea to build one, revalue, use the added equity to borrow more and keep going until you're done? (please tell me if I'm wrong on this).

Our equity would be $2m - $772k = $1.23m. Borrowing 80% of this gives us only $982,400. Not enough to build 4 at once, and we don't want to build on the cheap.

However, given that it has taken us a year to do anything, property prices in the area have risen approx 15% for 3bd houses according to figures. With the council planning laws changing, our place is now worth about $1.1-1.2 easily because of its subdivision potential that it didn't have before. This gives us instant equity. Should we use this equity instead of our cash to fund the subdivision? We probably will need to use some for the initial plans, but for the bulk of it, wouldn't it make more sense to save our cash? We are using it to help us with interest repayments at the moment and will put our tax returns back into it.

Final question: I was reading another post that talked about how some lenders will allow you to borrow based on equity that will be available at the end?

More figures to help:
Each block will be worth: $500k on average after subdivision
Loan for the land/blocks: $872k (if borrowing 100k from equity already gained to fund subdivision)
How much we are planning to build for: $1.6m
What do I believe end value for each block to be?: $1.2m approx

According to my calculations: (and this is where it gets murky because I think I'm creating a cross collateral now and I want to avoid doing that. We are a sibling team and not a married couple and thus eventually want to own outright two houses each from this plan). We owe approx $218,000 for the cost of the land per lot (This is $872k split into 4 separate loans of equal value), plus $400k for the cost of building each house, which means we have $618,000 owing to the bank on each house. But they're now valued at $1.1-1.2mil each (able to be rented out for $600-650 p/w). Multiplied by four, this gives us $2.47m loans with $4.4 to 4.8m value.

To me, this sounds easily like we should get the $1.6m loan from the bank to build if this is our outcome, but I'm not sure I've done this right or if I've misinterpreted what others have said. It would mean we have approx $482,000 equity in each house at the end of the day, or overall, $1,928,000 total equity after borrowing $2,470,000 from the bank.

$1.92m / $2.47m = 0.78. This means we're under the 80% LVR. So I guess I'm asking if we can borrow against the END equity, knowing we're definitely going to have some. Not even taking into consideration that in a few years when the build is actually complete, they may be worth more than just $1.2m.

 

I haven't read your post in full, but there is no way to avoid cross collateralising securities until the project is complete and new titles are issued.

Changing ownership from both names to one name may also result in stamp duty and CGT. This could have been avoided by setting up a deed of partition at purchase though.

 

I think that’s okay for now. For our first properties we had no choice but to do it together so we’d probably be fine keeping both names on there. Not really the issue we’re worried about

 

I would be interesting in knowing how your journey continues as we have a 1,600m2 block and would be likely doing a 4 lot in the future.

 

Oh cool! I think we will try go bigger next time now that I know about subdivision and probably try get a wider block or a corner block where we can have multiple access or a central driveway. Look forward to hearing about yours too. You could fit some huge houses

 

One of the biggest issues with 4 units on a single title development is valuation. Under residential lending the valuer is going to give the total development anywhere from a 20% to 40% shading of the overall value.

Is means you will need to bring more funds to the transaction.

Try and pull out as much equity as you possibly can from any existing properties.

You may benefit from decent system vals from lenders like St George and Westpac.

 

Why wouldn’t we have them all on separate titles?

 

4 is hard in residential finance. Subdivide first, then build is easier, however builders won’t give you the bulk discount they could if they were building them together.

 

Really depends on the DA - if you have approval to subdivide first and then construct then great they will be valued individually however most councils (well in NSW) give approval for construction first and then strata or Torrens title subdivision.

The key here is the which approval is the council going to grant as it will impact the valuation.

 

Welcome to the group!

If you can use that $100k and subdivide first you may still have the opportunity of doing a Deed of Partition now but it depends on how the title is owned now - tenants in common or joint tenants. My possibly terrible explanation goes like this...... currently you both own 50% of one block. You subdivide it and then you both own 50% of each of the 4 blocks. You do a Deed of Partition where you give your sibling 50% of 2 blocks and they give you 50% of the other 2 blocks and you will then have 100% of 2 blocks. This transfer does trigger transfer duty and CGT if the value of the block has gone up but it is best to do it now before you increase the value of each lot by building on it. Get some advice from a lawyer and accountant on this ok?

Have a look at a number of scenarios and you might find that selling them off as vacant blocks creates as much profit as building but with less risk. This is Melbourne and the market may soften and drop a bit in the 12-18mths it takes to build and get to market - you could sell off as land a lot quicker.

If your feasibility still works better as a build - and by "works" I mean makes 15-20% profit as you will need to pay a lot of tax plus GST plus selling costs etc from that money so it needs to be very very good - then build. You will be able to use the equity gained from the subdivision to hopefully fund the deposit needed for the construction loan. As each will have their own title they valuations and deposits needed will be less than if you subdivided after construction

 

Thanks for your response. I don’t think selling the blocks off is the smarter idea at all when you consider the long term compounding interest that will occur having four houses there as opposed to some cash in the bank.

Again, not so much interested in how the titles are split, just in the ability to get a loan based on completed value.

 

Ownership can relate to the ability to get finance.

 

If you subdivide first as was your original plan, do the deed of partition, then you have the 2 blocks each.
Then you might get a Line of Credit each party from your blocks which will pay for the construction loan deposits and build the 4.

Yes long term you will have compounding interest but you might also be able to use the money raised from selling the blocks to buy a better development site.

There is no bank that will lend you the money to construction 4 on 1 title on end values at this price point. It would need to be a commercial loan and that needs to be a lot higher deposit which you don't have.

So you only option is to subdivide first and then build if you wish. You can use the subdivision equity to create the deposit/equity for the construction loan.

Also please make sure your sums you are using are correct. If this is your first development you need to be very careful. There are a lot of things besides the construction costs which need to be factored in - for example town planner fees, architect fees, open space levies (which can be HUGE in melbourne), contingency amounts etc

 

PS it sounds like a great project which has great potential with the value increase that it's had due to the boom in Melbourne. I'm not trying to put it down or be negative, I'm just trying to point out you need to be careful.

 

$400k for a high quality house is not going to happen. The build price is 20% higher than last year alone. FYI