Servicing holding costs?

Hey guys, just wondering what people's different methods of servicing their holding costs during a development. Now I get that during the first half, when getting permits etc, you would have tenants in the house paying it for you. But what about during construction?

I've seen some of you guys on here have $3,000,000 developments. Even with interest only it can come to $2,000 per week.
How does one afford this? I'm guessing with a lot of you their would be a couple tricks to help with this?
Cheers

 

What size development are you looking at?

The main options would be to:
1. Save them
2. Capitalise interest over the development
3. Borrow them in initial loan
4. Borrow against equity in another property
5. Borrow them via mezzanine finance

Generally, you won't get the initial loan if you can't show you have the funds to cover your holding costs.

 

@Simon Moore has hit the nail on the head.

4 - Use LOC

 

6. Borrow from related entity

 

Thanks guys.
Trust me I'm know where near doing my first development. In the near future though.

What about refinancing money to buy an annuity? Would this work?

 

What do u mean?

 

Not sure if I understood the concept right.

Rixter posted a thread about using annuities/cash bonds. Not quite what in how I was saying.

 

Borrow to fund an annuity would result in a loss as the interest you pau on the loan would be more than the interest you received. The interest deductions would not be available in full but would be limited to the income received.

 

Knowing what I know now. I don't think I would start a development using borrowed funds for servicing if I couldn't fund the payments if I needed to. The risk of delay is too high.

That is withough using pre-sales. But again the risks would have to be measured.

Blacky

 

Interesting!
Banks will actually let you borrow money to help pay the mortgage?

 

Not knowly usually.

 

Even with presales, you cannot access the deposits to pay costs - this money sits in trust with the agent or solicitor.

 

Not knowingly with resi finance.
Not uncommon with commercial.

 

Yes, of coarse but still reduces risk, as the properties are less likely to be sitting on the market, unsold while you are at peak debt levels.
Obviously pre sales doesn't eliminate risk, but can be used to mitigate some of it.

Blacky

 

Seems 50% presales is the order of the day if banks are considering the deal and 100% if they are not!