Join Australia's most dynamic and respected property investment community

Development Finance (residential lending) - Profitability

Discussion in 'Property Finance' started by wombat777, 8th Oct, 2016.

  1. wombat777

    wombat777 Well-Known Member Premium Member

    Joined:
    18th Jun, 2015
    Posts:
    1,411
    Location:
    33°41'24.7"S 150°55'34.3"E
    When banks are assessing the profitability of a project for residential lending, do they take into account all the project costs or just the remaining project costs?

    I understand that the banks target a 20% profit after GST is taken into account.

    When assessing profitability do the banks take into account the DA phase costs (e.g. building design, town planning, engineering reports) and Building Approval costs ( working & engineering drawings, hydraulic plan, certifier )? By the time a finance application occurs, the costs mentioned have already occurred.

    Or do they just consider the remaining costs when assessing profitability? ( headworks & construction costs, council contributions, titling, legals )
     
  2. Colin Rice

    Colin Rice Mortgage Broker Australia Wide Business Member

    Joined:
    9th Jul, 2015
    Posts:
    1,078
    Location:
    Perth
    Resi lending will generally use land + construction costs (hard costs) as the value and borrow agsinst that.

    The soft costs you are referring to are generally paid out of your own pocket or better still used borrowed funds secured against another property for ancillary costs.
     
  3. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

    Joined:
    14th Jun, 2015
    Posts:
    1,158
    Location:
    Gold Coast
    Be mindful that if you have anything more than a duplex the valuation May likley have a 15 to 25 % haircut until the properties are fully subdivided
    Obviously this would not apply for commercially based lending where the lender may work off a Grv - end value

    Ta
    Rolf
     
  4. wombat777

    wombat777 Well-Known Member Premium Member

    Joined:
    18th Jun, 2015
    Posts:
    1,411
    Location:
    33°41'24.7"S 150°55'34.3"E
    Thanks, I have another IP that comes off fixed finance in June 2018. That will be a good time to extract equity. I've only recently extracted equity from my PPOR to put towards my recent purchase so will need to wait a little.

    I'll be aiming for an 80% lend scenario so will need to use residential lending ( 3 or most likely 4 townhouses ). Not in a rush. Kicking a development off would be 18 to 36 months away ( waiting for others to make the move first in this recently rezoned area ).
     
  5. Simon Moore

    Simon Moore Mortgage Broker - Melbourne Business Member

    Joined:
    4th Mar, 2016
    Posts:
    220
    Location:
    Melbourne
    @wombat777 it sounds like you may be confusing commercial and residential lending. Under residential lending the bank will not look at the profitability of the project, they will want to know:

    1. Can you service the debt - you can include the proposed rental from the new townhouses
    2. Will the LVR fit into their criteria (do you have enough equity)

    If the answer to those questions is yes, then you will most likely get approved.

    Commercial lending, on the other hand, is totally different, they will look at the project much more as if you are running a business. Do you have experience doing developments? How much is athe proposed profit (this will be checked by a Quantity Surveyor) etc

    By the sounds of your project you will be looking at residential lending. There are very limited banks that will do 3 townhouses and even less that will do 4 on residential lending, When the time comes try to talk to a broker who has some experience getting these across the line because they can be a touch tricky.
     
  6. wombat777

    wombat777 Well-Known Member Premium Member

    Joined:
    18th Jun, 2015
    Posts:
    1,411
    Location:
    33°41'24.7"S 150°55'34.3"E
    Ah! Thanks for making that much, much clearer.
     
    Simon Moore likes this.
  7. Colin Rice

    Colin Rice Mortgage Broker Australia Wide Business Member

    Joined:
    9th Jul, 2015
    Posts:
    1,078
    Location:
    Perth
    You can still extract equity from a fixed loan so assuming there is equity you may want to look at getting it now as you may not be able to get it later depending servicing position???
     
  8. wombat777

    wombat777 Well-Known Member Premium Member

    Joined:
    18th Jun, 2015
    Posts:
    1,411
    Location:
    33°41'24.7"S 150°55'34.3"E
    Thanks. That loan is with CBA and has been in place for about 16 months. It was a 90% lend. Market has moved perhaps 6% to 8% in that time. I'll raise it with my broker to determine timeframes but think I'll wait ( prefer not to grab it until I am almost ready to use it ).

    Perhaps better to extract more equity from my PPOR late next year if the market in Sydney keeps simmering ( most recent equity release was 3 months ago after refinancing ). Fortunately due to the north west rail link there is an equity gold mine under my house.

    My portfolio LVR for my PPOR and my 2 IPs is sitting at about 70% so that should leave me with some wriggle room. Good thing that my latest purchase is a 6% yield.
     
    Colin Rice likes this.
  9. Colin Rice

    Colin Rice Mortgage Broker Australia Wide Business Member

    Joined:
    9th Jul, 2015
    Posts:
    1,078
    Location:
    Perth
    Can someone turn on the burner for the Perth market please :D
     
  10. wombat777

    wombat777 Well-Known Member Premium Member

    Joined:
    18th Jun, 2015
    Posts:
    1,411
    Location:
    33°41'24.7"S 150°55'34.3"E
    I'd like the burner for the Brisbane market turned from low to medium.