Property Development Finance 101: Everything You Need to Know
Published 4:28 am 7 Oct 2021
Are you trying to learn how to finance your next property development? Don’t worry, in this article we’ll cover all of the different strategies that are available to you.
Property development finance is a specific type of finance you’ll need to secure if you’re thinking of undertaking any development of residential, commercial or mix-use real estate, whether that be subdivisions or DA uplift, renovations, small unit developments or any other form of developing land or property.
And let’s not forget, property development can be expensive and time-consuming, especially if you don’t know what you’re doing. From acquisition costs to development & construction, taxes and council fees, it all adds up very quickly and if you’re not prepared, your potential profit could get eaten up by a mountain of expenses. If you’d like to learn more about the holding costs associated with property development, you can find out more here.
This is why it’s important that you carry out a feasibility study prior to embarking on your next property development venture so that you know whether or not you’ll recoup your costs, and whether or not there’s any profit to be made.
But first, let’s just cover some of the benefits of property development.
What is Property Development & Why Do it?
Property development is the process of developing, altering or improving upon an existing building or vacant land in order to produce a higher value than existed previously.
Property developments are attractive for a variety of reasons, but primarily, for most people, the main reason is to manufacture equity and profits quickly, rather than simply waiting for the market to create capital growth.
Small property developments can yield returns that are potentially much greater than traditional property investing, as well as the opportunity to generate profits in a shorter period of time than what it would take for the market to grow through normal market forces.
Small property developments generally fall into three different categories; residential unit development, DA uplift and subdivisions. If you’d like to learn more about these different types of property developments, you can read more here.
How to Get a Loan for Property Development
There is a lot to be gained from a successful property development, but before you start to add up your potential profit, you should first understand all the moving parts that are required for the successful completion of your next property development.
This is why it is essential to complete your feasibility study prior to seeking out finance for your project. A comprehensive feaso will help you and your creditors, by setting out the costs involved with your project, along with the estimated profits your project will stand to make given the market, comparable sales, financing costs and per square metre cost of construction. Your feasibility should also contain a contingent funds allowance should the project be faced with cost blowouts and time overruns due to unforeseen circumstances.
Being armed with a fully thought out feasibility study will provide you with the best chance of securing development funding, especially if you don’t have a track record in the industry. This will also provide creditors with greater confidence as they will see that they are dealing with someone who has carefully considered all aspects of the project being tendered to them.
Things to consider when approaching creditors for finance are:
- How much funding will you require for your project?
- How long will your project take to complete?
- What funds will you be contributing to the project?
- Can you confidently expect to secure the required pre-sales as a prerequisite for your creditors?
- Is there a market for the finished product?
- What is the projected profit for your property development?
Providing confidence to your creditors by clearly demonstrating a healthy ROI and a minimum risk profile, will be essential for your success. This is even more so if you do not have a track record as a property developer. If this is the case, think hard about engaging an experienced project manager on your first project as this will also provide additional confidence to creditors knowing that their funds will be used effectively.
Property Development Finance: How it Works
Once you have completed your feasibility study, you can then approach a lender for your financing. At this point, you will need to determine whether you are seeking a residential or commercial development loan.
Residential development loans will typically have up to three dwellings on one lot, and if the number of dwellings exceeds three, developers will require a commercial development loan.
These loans can then be provided either by traditional lenders, or private lenders.
Traditional lenders will provide up to 80% loan-to-value ratio (LVR) for two dwelling projects and up to 70% for larger projects, which means you will have to provide a 20-30% deposit.
Traditional lenders will then require evidence of your:
- Credit history
- Assets & Liabilities
Generally speaking, approved property development loans are usually 3-3.5% higher than the standard variable interest rate.
Private lenders, on the other hand, will require less red tape and may provide you up to 65% of the Gross Realised Value (GRV) of the project. GRV refers to the projected completed value (excluding GST) of the property development. However, private lenders will often charge higher rates and fees compared to traditional lenders.
Property Development Pre-sales
A pre-sale refers to the sale of a unit holding in the property development prior to commencement of construction. Pre-sales are very important for property developers to think about when seeking funding. This is primarily because pre-sales confirm that people are willing to buy your end product, and it also mitigates risk from the lenders perspective.The pre-sales will constitute your contribution towards the project.
In many cases, pre-sales are a prerequisite to getting funding for your project.
Can you use pre-sales to fund your project?
While pre-sales play an important role when trying to secure funding for your project, they are not funding in and of themselves. Instead, pre-sale funding is held in a trust account, where it will stay until the completion of the build.
However, developers will not have access to this money until the project has been completed. If the project fails to be developed to completion, the presale money will be returned to the buyer.
Property development loans explained
In order to shield themselves from risk, banks and other financial institutions typically provide property development loans in a staggered fashion, with additional funding released at the following intervals:
- Deposit 10.00% – Upon signing of the building contract
- Slab Laid 10.00% – Site clearing, rough-in of in-ground services and slab laid.
- Framing Complete 20.00% – Structural wall and roof framing.
- Lock Up 15.00% – Roofing installed, doors & windows installed and external cladding.
- Gyprock Complete 15.00% – All internal linings to walls and ceilings including services (electrical & plumbing) roughed-in.
- Fixings Complete 15.00% – Sinks, tap ware, toilets, vanities, kitchen and bedroom joinery. Floor finishes.
- Painting Complete 10.00% – Internal & external painting
- Practical Completion 5.00% – Final completion of all works and the provision of the Occupancy Certificate (OC).
Note: The contractual Defects Liability period (usually 3 months in a residential development) commences at Practical Completion. Statutory Warranties continue beyond the contract liability period – These vary state by state.
Property Development Finance facilities which involve multi-unit developments are structured differently. The costs are assessed by a Quantity Surveyor (QS) appointed by the lender and monthly progress claims are submitted by the builder to the QS (usually via the client or project manager).
The QS will assess the works completed against the originally bank approved project budget and pay according to the works assessed and completed to date but off-set cross referenced against the cost to complete. The bank needs to be satisfied that there are always sufficient available funds in the budget to complete the works.
Raising Money for Property Development
Traditionally banks have been the primary method for sourcing funds for property developments, and as we previously mentioned, most banks are happy to do so, provided they can see a realistic ROI on the project and the return of their funds in a timely manner.
However, there are alternate methods of getting funding for small property development, such as equity partners, joint ventures, and private lenders.
How to Develop a Property Through Alternate Sources
You might think the idea of developing a property in Australia with limited finances is impossible – the fact is, the practice is not so uncommon and is also readily available.
With a solid plan in place, and a clear pathway to profitability, financiers and money partners will happily finance a project if they can foresee a return on their investment.
At the DG Institute, we have created a program designed to teach everyday Australians all the necessary steps involved when undertaking your next property development. Everything from sourcing, structuring and financing the deal.
And, for those who wish to take it a step further, we have an elite group of coaches with hundreds of deals under their belts and years of experience with proven track records that can walk you through the A-Z of property development. From formulating your plan, to obtaining finance, and seeing the project through to fruition, our coaches have seen and done it all.
You Don’t Want to Miss Out
Property development can be a rewarding way to generate income or profits if done effectively. With the right know-how and pragmatic approach, securing property development finance can also be achieved successfully, if sourced correctly with the right broker. At DGI Finance, we can assist you with your requirements and objectives and help you achieve your property development goals.
Whether you choose to undertake your project with the involvement of money partners, financial institutions, or equity partners, there are many avenues for you to pursue. However, it is important you understand both the risks and costs associated with your choices and the best way to mitigate these is through the help of a qualified broker.
If you’re interested in learning about property development more thoroughly and building a network of individuals that have a common interest in property development projects, you can find out more at our Property Development Webinar.
You May Also like to Read
On the surface, Australia’s economy seems to be on the rebound from COVID-19. However, when you dig a little deeper,...
The Australian dream has always been to own property, but why not build your own? Building a new home in Australia has...
Australians are now getting less bang for their buck than ever as ABS data finds wage growth is at record lows. On...
Have you ever considered doing a small property development? Here are a few reasons you should quit considering it, and just...
A ban was placed on all non-urgent construction within New South Wales amid rising COVID-19 cases. Cases of the Delta...
COVID-19 may have put housing prices into decline, but there’s still money to be made in the property market. By carrying...