Who can I borrow from - for townhouse development

Discussion in 'Loans & Mortgage Brokers' started by Keentolearn77, 10th May, 2017.

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  1. Keentolearn77

    Keentolearn77 Well-Known Member

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    Hi

    Scenario - building a 4 townhouse development,
    - 50% self funded
    - plan to hold all properties on completion

    seeking to borrow possibly $500-700k loan

    My loans broker has said that I'm really moving into what they would deem 'property funding' as opposed to property investment (EVEN THOUGH I WOULD BE RETAINING ALL PROPERTIES), and that it is not likely I would be able to obtain a normal investment property loan from the big banks.
    If doing pre sales - I could get a loan of 6-7% (100% debt cover)......
    But as I am seeking to retain / hold all properties then I would have to go private funding which would be upwards of 10% interest rate loan.

    Does this all sound kosher....

    Wondering to? if I have to go private at 10%. Once completed, could I roll that loan over into a normal investment loan at a better % rate....
     
  2. Jess Peletier

    Jess Peletier Mortgage Broker & Finance Strategy, Aus Wide! Business Member

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    Try RAMS, they'll do it as Resi no trouble at all.
     
  3. Corey Batt

    Corey Batt Well-Known Member

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    You can do 4x townhouses in residential investment lending - the issue may be with your servicing which may not support using the lenders which would allow this and so have to go down to commercial lending to support the finance.

    If you go through private funding, once complete and four individual properties were hold then you could indeed get them refinanced so long as serviceability permits.
     
  4. Simon Moore

    Simon Moore Residential & Commercial Mortgage Broker Business Member

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    For a four on one title I normally try BankWest first (because they are cheaper than RAMS), if you have the borrowing power with them great! If not, try RAMS. If it doesn't work with RAMS then try commercial, but you would most likely be asked for pre-sales.

    Sounds like the broker you are dealing with is not familiar with funding developments under residential finance.
     
    Last edited: 10th May, 2017
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  5. Keentolearn77

    Keentolearn77 Well-Known Member

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    Perhaps thats why my broker is private funding as I would unlikely get residential finance as i do not want to do any pre sale - (i want to hold them all)....
     
  6. Jess Peletier

    Jess Peletier Mortgage Broker & Finance Strategy, Aus Wide! Business Member

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    You can hold them all with both BW and Rams - they prefer it under resi. If you're selling they'll prefer you go under commercial.
     
  7. Simon Moore

    Simon Moore Residential & Commercial Mortgage Broker Business Member

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    @Keentolearn77 sorry to confuse you, under residential finance you can hold onto them all, but you must be able to demonstrate to the bank you have the borrowing power to repay the loan.

    Under commercial finance they will generally want pre-sales, but you don't need to demonstrate the borrowing power (assuming you are retiring all of the debt via selling the townhouses).

    Does that make sense?
     
  8. Blacky

    Blacky Well-Known Member

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    Commercial funding for 4 townhouses, at 50% LVR and with a fixed rate, turn key buidling contract shouldnt need pre-sales.
    You will pay more (around the 6%mark all up), plus estab fee, plus some other fees, plus plus.
    However, with this you should be able to capitalise interest, which helps save cashflow.

    However, its short term finance until individual titles are issued, and you should be able to re-fi into resi. Provided you can meet the lending requirements.

    People are scared of commercial cos its a different beast. However, provided the development still stacks up it should remain an option.

    Blacky
     
  9. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Have a back up plan in case. Imagine you got the construction done with private funding and then could not service and therefore not be able to refinance out.
     
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  10. Keentolearn77

    Keentolearn77 Well-Known Member

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    Sorry - when you say commercial finance - do you mean the Big 4....?
    retirning the debt.... via selling (I'm planning on keeping and paying down the debt over time)...
     
  11. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    You need to use a broker familiar with development finance. Your branch lender or resi broker could be out of their depth for the product alternatives. It has got harder to get approval.

    I would suggest Shahin from Elite Property Finance on 0420987683
     
  12. Keentolearn77

    Keentolearn77 Well-Known Member

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    If I want to aviod getting individual titles (i believe I have 5 yrs from Subdivision permit approval before I have to lodge at LTO) thus avoiding massive jump in values and jump in Land tax brackets...... Would this preclude me from refinancing in Resi....

    Any laymans definition of the 'commercial gamut'.....?
     
  13. Corey Batt

    Corey Batt Well-Known Member

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    No.

    Finance is segmented into different categories, ie:

    Residential: single dwellings, units, apartments, construction of 1-4 properties dependent on the lender policy, small groups of units etc
    Commercial:4+ developments, commercial property, some mixed residential/commercial use property etc
    Business: Anything business, in most cases this will be mixed with the commercial category

    Different types of finance have different requirements, rules and products. Commercial is generally more restrictive in terms of larger deposits and costs, however has greater flexibility in what they will allow you to do, how they calculate the ability to repay debt etc - this is where a development such as you're proposing can gain more options.
     
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  14. Simon Moore

    Simon Moore Residential & Commercial Mortgage Broker Business Member

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    Very big call there, maybe 18 months ago, but for first time developers the majors are asking for pre-sales on everything now. They have had a 'change in appetite' as they like to say.

    @Corey Batt gave a good explanation. When we talk about commercial finance we are referring to 'unregulated' loans, this is the type of finance that most people won't deal with.

    Residential finance refers to what everyone uses when purchasing a property. It's 'regulated' and much more standardised than 'commercial' finance.

    There is no 'right' answer, residential finance will generally have much lower fees, a lower interest rate, no need for pre-sales, you won't have the risk of not being able to refinance on completion and most importantly no need for a quantity surveyor to inspect the units at each stage. I have three 4 on 1 developments going at the moment, all done under residential finance.
     
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  15. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Commercial can have some valuation differences that can work for and against you. Brokers will know who does what.
     
  16. Blacky

    Blacky Well-Known Member

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    Ahh - true.
    Forgot about the first time developer biso.
     
  17. Hamish Blair

    Hamish Blair Well-Known Member

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    The lender may apply a "discount in one line" to your 4-pack, which could be say 20%.

    I did a construction loan based on completed value, and the bank lent me 64% of the finished value based on an LVR of 80%, and a 20% in one line discount. The in one line discount applies because the dwellings were not sub-divided so if they needed to sell them they would have to sell three townhouses in one lot rather than individually. Less buyers for three townhouses.

    So 80% * (1 - 20%) = 64%.
    If you can fund at least 36% of the finished value (land and construction costs) then you may be OK.

    Don't forget to think about GST - if you are holding them for more than 5 years you won't have to remit GST on their eventual sale (but if you have claimed GST during construction then this will need to be repaid).
     
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