construction loan - borrowing capacity

Hi everyone, my parents are looking at various investment options, including considering buying a piece of land, do a subdivision and then build and sell for a profit. Whilst they can probably fund the bulk of the financing, they'd rather not so they want to know their lending options. Problem is they are considered equity rich and cashflow poor. My question is for a standard two-yr progressive draw construction loan, how do lenders assess borrowing capacity?

Understand for a usual property purchase the general idea is take after-tax income minus expenses minus debt, then compare the free cash flow to sensitized loan repayments (IO or PI), but in the case of a construction loan where it's only 2-yrs IO, do banks still require cash flow to the same level? What if you can demonstrate you have equity to pay for the interest (on top of your expenses) and am willing to sell the resulting assets post construction to repay the debt? Just interested in how the lenders usually assess these situations.

 

Usually for <4 would try to complete under a residential loan, lower rate, less restrictions.
Really just showing that you can service the debt based on income, including future rental income from the properties.

But by what you're saying sounds like would have to be looking commercial.
Would be looking at when the debt could be cleared, pre-sales would be a must.

 

I managed to borrow based on a discount to gross realisable value. Independent valuation of vslue as though completed, 80% LVR.

They then applied a further 20% discount "in one line" as the three townhouses had not been subdivided. So effectively I borrowed 64% of GRV.

Anle to refinance once subdivided.

 

For construction most banks will look at servicing the same as though you applied for a standard loan, i.e. P&I on a 30 year term minus the IO construction period.

If you're going commercial it's a different story and will depend upon, pre-sales, cash flow, GRV and exit strategy.