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March 12, 2015

Finance mistakes to avoid for small private developments

By DON CRELLIN

It’s no secret that moving into the property development game can be extremely rewarding, both financially and personally. However, it’s also common knowledge that it takes a lot of research, hard work and dedication, otherwise everyone would be doing it. This is why you need to make the most of your investment to maximise returns, minimise risks and have a successful future.

A big part of achieving that is finance. We see a lot of first time developers hoping to secure a loan, only to have their plans thrown into disarray due to a problem that could have been easily avoided. That’s why we’ve put together the most common challenges we experience to prevent them happening to you.

Valuations

A major challenge we often encounter is a plan to develop multiple properties on a single title. While this has many advantages for reducing expenses, it has limitations with regards to finance. Lenders will usually value the dwellings lower than if they were done individually because it is much harder to sell an entire block of units. As a result the amount banks are willing to lend may not be sufficient for what’s required and it could cause future equity problems for further investment.

Another issue is that most lenders will view four or more dwellings on one title as a commercial investment, which means rates and fees may be higher plus greater levels of equity are required.

Finance promptly

Don’t leave your finance too late! By obtaining pre-approval not only will you get a good understanding of your budget but you’ll also know how much you can spend and what your profit margin should be. Importantly, you can show you are a serious buyer when searching for land.

Meeting finance requirements

Don CrellinAnother common roadblock borrowers come across is that they don’t have the necessary funds or equity in their home to cover a deposit. The minimum requirement is typically 20 per cent, which can equate to a substantial amount of money. Any savings are best accumulated in an offset account to reduce interest on your existing home loan.

Just focusing on interest rate

When selecting which loan product is right, you need to look at more than just the rate. There are always a number of fees and charges involved which, when added up, could result in the product with the lower rate costing more over the duration of the loan. There are also features such as offset accounts, extra repayment facilities and added flexibility which could be a better fit for what you’re trying to achieve, but aren’t included with every product. You also need to consider fees in loan portability, security substitution and valuation, all of which would apply in a subdivision scenario.

Not using a mortgage broker

Not all banks or lending institutions are prepared to lend for a development project. Also not all lenders apply the same credit policy when assessing a project. So the best way to avoid an issue, as well as those above, is to seek the advice of an expert. Mortgage brokers are able to review the project as well as your financial position to make a lender and product recommendation specific to your needs. They’ll also assist in lodging, following up and the hard work involved with a loan application, to save you wasting your time researching options or making unrealistic plans.

As well as making sure you have the right deal, your finance broker can also assist in the initial feasibility of any project to ensure you meet the required criteria and determine whether your loan can be considered a residential investment loan or a property development loan.

Conclusion

While small private developments can be stressful and take a lot of hard work, they can also set you up for financial freedom when done right. This is why the finance package you choose is important, as it’s a major factor in the success of your development. So, do your research, plan thoroughly and take advantage of the services offered by a mortgage broker to help avoid mistakes that could cost you in the future.

About Don Crellin

Don Crellin is the general manager at Resolve Finance, a mortgage brokerage specialising in construction finance. Don has more than 25 years’ experience in the mortgage industry.

View all articles by Don Crellin »

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