First Subdivision - Early stages: Funding the subdivision

Hi All,

Looking to get started on my first subdivision within the next few months in Scoresby, Melb. Will be retaining the existing renovated dwelling which I purchased April 2014 and building on the back.

Estimate figures below; Any thoughts or comments on feasibility would be great.

Current value - existing renovated dwelling on 868sqm: $620-$640k (purchased for $525k in 2014 + $45k spent on reno)

Value of existing renovated 3/1/1 dwelling if land subdivided on 468sqm: $600-$620k

Value of new 4/2/2 double storey townhouse on approx. 400sqm rear allotment: $650-680k (based on recent comparable's)

Cost to subdivide and build: $40k plans + permits. $260k - $300k build depending on quality of finishes. working off approx $13k - $15k per square.

With the above in mind, end result would be aiming for total value around $1.2mil. Total loans would be around $750k.

Looking at advice on funding the project or for any things I should be cautious of prior to getting things started.

At the moment I am living in the existing house with 2 room mates to help pay the mortgage. Current loan amount is $420k and awaiting a few finishing touches before having the property valued but should come in around the $640-$660k mark.

What is the best way to structure the loan for the subdivision? I'm going to need approx $40k to pay for the surveyor, town planning drawings, council lodgment, arborist report, soil report, landscape plan, council contributions, estimated interest costs etc etc. to get it to a point where I have plans approved and ready to build.

I will be looking to make use of current available equity in the property and would like any advice on how I am best to do so.

Obviously the next step will be to discuss in further detail with my broker but would like advice from others that may have experience. I will have an amount of cash available to get things moving initially but will need finance to complete the planning/permits stage.

Apologies for any mistakes/naivety, this is all reasonably new for me!

Thanks in advance!

 

Well done mate. I recently used equity from other properties to fund the planning stage for my Brisbane subdivision. Then when I am ready for the construction I will use the equity in the land to fund the construction costs (as there is enough).

I could give you my 2 cents about the finance structure etc but the best thing to do is to find a good broker who understands how to structure things to maximize your situation and best outcomes for you. Someone who has gotten finance for others doing developments and comes well recommended is best imo.

Also just make sure your feasibility is on the money as much as possible and the build specs is really reflective of the target market and what's in demand and also what will command the best value for your end figures.Don't forget the contingency.

Well done mate.

Just my 1.5 cents.

 

Thanks Leo,

Hope all goes smoothly with your project. I've got plenty of reading to do and looking forward to discussing further with my broker.

I have a unit also which has some equity available so im probably going to use that to fund the planning stage and then get the house valued to see what equity I have available there for the build.

At this point I'm thinking a mid range build would be best suited to the area. I have a trade background so will be discussing with the builder options to bring build costs down if I am able to do parts of the internal fit out (eg. cabinetry, kitchen, painting etc.) that way I can hopefully go with a few higher spec items with the cost savings.

Will update with progress along the way.

Cheers

 

@dan_89 sounds great mate. Looking forward to reading your progress with it. Surprised only got 1 response though.. hopefully others can chip in their advice.

 

The key thing you are missing i think is that you can't just do subdivision and building together, they are separate things.

The council will usually require you to ready services to each individual block, this will require operational works like all demolition, sewerage, water, power, cross overs. Once that is done, they will plan seal the separate blocks. This gets then to the normal stage that vacant land is sold at. Then you can build. Most buildin builders won't even be interested in talking until you get here.

Generally speaking, the bank will not loan you money for any of that operational work. You will need a line of credit from equity in the existing undivided block, or cash. The works will probably be $30k but can vary immensly, and it is paid before the council contributions.

You need to start with planner and surveyor to figure out where all the services are going to come from. Realistically you can't assess until you take the plunge and fork up $5k for survey and plan.

 

In Vic (not sure about other states) you can complete the build and then the subdivision. It does not have to be the other way around. For units this is normally councils preferred route IMO.

 

@Caltan In brissy you need to subdivide first, and then can build. But yeah different in Sydney as you can start building and then get the subdivision later.

 

@dan_89 and @Leo2413 how do you decide when is the appropriate time to subdivide and build? What market indicators do you look at?

 

As for finance my first one I funded hard costs and 20% of land. Post permit with construction contracts in place I refinanced for construction.

 

@larrylarry I look at the numbers. If the land cost X amount, and the build will cost X amount, and the total sales of both will give me a gross return on total cost of at least 20-25% then I would most likely go ahead with the deal, all other things being equal. I dont really look at the market indicators unless they are significant eg, its the beginning of the boom so I might build and then sell closer to the peak, or if the market indicates a downturn then factor that into the feasibility. But as long as the numbers make sense from the outset with a decent contingency then it's a goer for me.

With regards to subdividing, if you have to do it first then you just have to. If you are allowed to build first, then you can wait for the walls to be up, then get the surveyor to do the 88b subdivision documents preparation to submit.

 

Thanks Leo!

 

np mate. Its all a crazy process and I'm also just trying to get by at times

 

In Victoria you can build first and then subdivide (most common) or you can subdivide first and then build (less common, what I did).
Just note that Victoria unlike some other states does require approved planning before you can lodge a subdivision so to protect themselves the council will make you lodge a 173 agreement in the plan of subdivision. It is basically a caveat on title saying the land will be used for the purpose of the permit.

For my 2 cents you MIGHT have enough to build first if you can service the loan.
Your combined value of 1.3mil is based on subdivided lots and a valuer from the best of my knowledge is going to value the finished product about 20%+ less if not subdivided (What happens if it goes belly up, they are stuck with a 2 house/1 block property). So the valuer is likely going to see it more at 1mil.
Even so if you take your current loan of 420+40k subdivision costs+300k build then you will still be under 80% LVR.

The other option is release 60k equity from your property and just use that for the subdivision. Once the subdivision goes through get the land valued and use the equity from the 2 properties to fund the build.

You should definitely speak to a good broker who understands tax as well as finance though, I recommend @Peter_Tersteeg who is based in Melbourne and has a great grasp on both sides.