How much can I borrow?
Do you need a residential development loan for your next big investment?
Small developments (up to 4 dwellings)
- For 2 dwellings: Borrow up to 95% of the land and construction costs (hard costs).
- For 4 dwellings: Borrow up to 80% of the land and construction costs (hard costs).
- Borrow up to 100% of the market value of the property plus any costs associated with completing the purchase with the help of a guarantor.
Medium developments (over 5 dwellings)
- Borrow up to 70% of the land and construction costs (hard costs).
- Borrowing more than 70% is possible with a private lende but they will charge a higher interest rate than the commercial rates we can negotiate.
- You need to meet 70% of the GRV (gross realisation or on completion valuation).
- A profit margin of at least 20% of costs is the minimum bank feasability requirement.
- Loan term: Up to 3 years.
- Minimum loan size: $1,000,000.
- Maximum loan size: Anything over $20 million considered on a case by case basis.
- Borrowing at higher LVRs means you’ll pay a higher interst rate with a private lender.
- Residual stock loans are available to help maximise your return on investment.
- We can help you qualify for a commercial development loan for such projects as multi-unit residential blocks, small office buildings and retail shops.
We have strong relationships with lenders that understand your plans to build a duplex, triplex, townhouse, or a larger commercial property.
Call us on 1300 889 743 or complete our free assessment form to find out if we can get you approved.
The last thing you want to do is run out of funds before construction is complete so setting up your loan in a way that supports your needs is crucial.
Do you need contingency funds?
Some banks require you to have contingency funds but some don’t!
We can help you find a more flexible lender and negotiate higher Loan to Value Ratios (LVRs) and lower interest rates than you would normally be able to qualify for if you were to go to your own bank.
We have a range of major banks and non-banks to choose from and understand how to build a strong residential development loan application.
Speak to us and get approved to first time around with a loan that will support you throughout the construction.
Is this a residential or commercial loan?
A residential development loan is for the purposes of building a maximum of 4 units on one title for residential purposes.
This could either be a duplex, triplex, townhouse or a small unit block.
Anything more than 4 units will need to be assessed by the commercial department of a lender and fall under commercial development loans.
With a residential development loan, your interest rates are a lot lower than getting a commercial loan.
Do lenders require a personal guarantee from shareholders?
If you wanted to purchase and develop land in a joint venture structure, typically the project manager and the service partner would be appointed as directors (and guarantors).
The money partners in the trust structure would appointed as shareholders/unit holders.
Generally speaking, all shareholders are required to provide a guarantee by default but this is negotiable depending on the strength of your case.
In particular, if your Loan to Value (LVR) is low, we can negotiate to just have directors and shareholders of significance to provide guarantees.
Do I always need to set up a trust structure?
Some banks require you to set up your loan in the name of a company or trust because the residential development loans are unregulated.
For most lenders, this isn’t a requirement of approval.
How does a residential development loan work?
Like a normal residential construction loan, the bank will release funds at the end of each stage of development.
These stages are typically as follows:
- The deposit.
- Base stage.
- Frame stage.
- Lock-up stage.
- Fixing stage.
To receive each progress payment, it’s simply a matter of signing a progress payment request and sending it off to the bank along with an invoice from the builder.
For the first progress payment, you’ll have to provide a copy of the receipt from the builder showing that you’ve sent them the funds you’re required to contribute.
Getting progress payments can be delayed due to bank mistakes like losing your files but it helps if you have a specialist mortgage broker on your side who can manage all of this for you.
In this way, the progress payments can be smooth and you won’t be left in cashflow limbo with builders and tradesmen down your throat asking for payment.
How will the bank assess your development plans?
Think of a residential development loan application like pitching a business opportunity: the bank wants to know that the development you have planned is going to be viable and profitable.
Along with your personal financials, most lenders will also want to see a property development business plan or a feasibility plan showing the costs of construction versus potential profit.
It should look really neat and professional because it shows that you’ve done your due diligence on the project.
What you’ll generally want to provide in a business plan is:
- What funds you have to put towards completion (not including your security for finance).
- Contingency funds in case things go wrong (some lenders like to see 10-20% in contingency funds if you’re an owner builder).
- Your experience as a developer in the construction of similar-sized projects.
- The experience of the building team (including their certifications).
- A description of the site, its location and zoning.
- A design concept.
- The costs including landing, construction and soft costs.
- Construction timeline.
- How you plan to sell the properties or whether you have tenants lined up.
There are firms and companies that can help you draft a professional property development plan.
By doing so, you have a much stronger chance of getting approved.
Is this your first residential development?
Although you’ll generally need previous development experience in either a developer, builder or project manager capacity, one of our lenders may be able to help you if this is your first time.
- You can borrow up to 70% of the Gross Realisation Value (GRV) or 80% of the hard costs.
- Available for up to four dwellings up to $1,500,000.
- Some lenders don’t need proof of income if you plan to sell the properties on completion.
- No presales are required for small duplex, townhouse and unit developments.
Fill in our free assessment form to discover if we can get your approved!
You need to present a feasibility study
The bank wants to know that you’ve accurately calculated the costs of construction versus your return on investment or profitability margin at the end of the project.
Project costs include:
- Development Application (DA): These costs can vary from council to council.
- Construction costs: This includes hard costs for material, paying builders and contractors, overruns such as where excavation machines are needed to cut into rock or when you’ve already presold a unit but the customer wants to upgrade building materials or finishes.
- Selling the property: There’s stamp duty and professional fees for real estate agents and solicitors that can amount to roughly 6.5% of construction costs.
- Unpredictable overruns: Costs can quickly blowout as projects get delayed – you can’t control this but you need to factor a certain buffer based on your own feasability study and market research.
This is not an exhaustive list of costs but it gives you some idea of what you’re up against.
In the end, you need to work out that at the end of the project and presales, you’re 20-30% ahead in profit.
If so, you’ll have a good chance of getting approved.
Will the bank accept proposed rental income?
The lender will either ask for a letter from the real estate agent to confirm the market rent income or they’ll use the rental figure estimated by the bank valuer.
They can accept up to 80% of this projected rental income which can seriously increase your borrowing power.
Note: Rental income on vacant land will not be accepted but it may be accepted if there is a construction contract in place.
How will the bank look at my situation?
When applying for a residential development loan, the bank will want to know exactly what type of borrower they’re dealing with.
As a minimum, they want to see that you’re in a good financial position with good security, you have previous building or development experience in a similar-sized project and that you have a solid development plan in place.
Like other types of residential loans, you’ll generally need to provide your last two payslips, your last three months bank statements and your last 2 years group certificates.
This is to verify your income to work out your means of making residential development loan repayments.
As evidence of good character, you’ll need to have a clear credit file with major banks but one of our lenders may accept your application even if you have a bad credit history as long as you’re in an otherwise strong financial position.
Your security for the loan can either be cash or equity in an existing residential property.
If you need to refinance your current mortgage to access equity in your property, complete our free assessment form and let us know your plans.
Will I need presales?
Unlike a commercial development loan, you don’t need to pre-sell any of the properties or units in the development in order to get approved for a loan.
There may be exceptions to this rule if you’re planning to build in an area outside of a metro or inner city or particularly in a rural location, which is seen as a higher risk.
Use the postcode location calculator to find out whether your development is in a high risk postcode.
In any case, having some presales does add a lot of strength to your application!
Many lenders require presales to equal the amount of debt but some can take less.
For example, with a 4 townhouse development in a high demand area, the bank will still consider your application if you have anywhere between 0-4 presales.
What about presales for larger developments?
For commercial developments, some lenders require 100% presales (genuine, unrelated parties) before they will approve your loan
However, if GRV is less than $5 million, they can accept 50% presale debt cover, albeit, this will generally be at a higher interest rate over a 15-year term.
Debt cover or Debt Service Coverage Ratio (DSCR) is used by commercial lenders to work out the Net Operating Income (NOI) to the debt service.
Put simply, the bank wants to know that the presales will cover the whole debt or at least percentage of it.
For example, if the entire project is set to cost $2 million, you may be required to presale at least $1 million (50%) before the bank will consider your application.
Does the development cover soft costs?
Depending on your investment strategy, you may actually need two to three loans throughout the entire development process, specifically:
- A “land loan” to cover the cost of buying the block of land.
- The construction loan, to cover the building costs.
- An investment loan if you’re planning to hold on to one of the properties.
What about the cost of the development application (DA) and other soft costs?
Soft costs are generally considered as costs that aren’t labor and materials. These “extra” development costs relate to:
- DA approval from the local council
- Clearing the block of land
- Driveway and landscaping
- Legal fees
Many first-time residential property developers are often surprised that the development loan only covers the land and construction costs.
Make sure you take into account these extra costs when calculating the total cost of development.
The way around it is if you bought the block of land a few years ago and have paid off a good part of the land loan.
If you have the equity, you can cash out and use these funds to cover some of the extra costs.
We can help you refinance your existing mortgage to fund a residential development loan!
Alternatively, if you can provide formal written quotes for these soft costs we can often get the bank to extend the loan for these costs.
It really depends on the nature of the work and the lender that we’re working with as to whether this will be possible or not.
Call us on 1300 889 743 or complete our online assessment form and let us help you plan out your residential development loan so you can have a smooth construction process and get help with your development application (DA) if you need one.
Can I switch to a residential loan?
You should speak to your mortgage broker to find out whether you qualify!
When the project is complete and you have been given an Occupation Certificate, you can potentially refinance to a residential home loan and save thousands by paying home loan interest rates.
You need to have been paying the development loan for at least 12 months before you can refinance so as to avoid break costs.
This option is typically only available to developers that have sold one or two units to meet the standard 100% debt cover requirement.
In this way, you can save thousands in mortgage repayments and potentially sell at a higher price in the future.
This is for sophisticated investors only so we recommend that you seek proper financial advice before considering this investment strategy.
Residential development loan FAQs
A residential development can potentially return higher dividends than simply investing in an existing residential property.
However, there is a lot more risk involved constructing a duplex or townhouse for investment purposes.
Apart from choosing the right location and researching the local market, sometimes things can go wrong with the construction process so you have to be prepared.
Where do I start?
Before even applying for a residential development loan, you should consider why you’re developing in the first place.
The most fundamental questions to consider is whether you plan to sell all of the properties, keep one to live in and rent it out or rent out all three as investment properties you will keep for a long time.
Answering this question should determine where you want to purchase and what kind of multi-dwelling property would best suit that location and market.
For example, you wouldn’t want to develop a triplex in a suburb with an over-supply of townhouses. Check the council for development plans before committing to purchase a block of land.
While you’re contacting the council, consider the zoning of the area you want to build and whether your property will be accepted.
This will give you some idea of whether your DA will be approved.
Look at the development like business stock
Residential developers aren’t property investors in the normal sense of the word.
While an owner builder is thinking of the cheapest way to construct, they may even consider delaying the project.
The developer, on the other hand, is focused on how quickly they can get their money back.
To explain, if the developer had $300,000 tied up in the development, they’re unable to invest that money elsewhere.
The missed opportunity to put your money to work in other investments like real estate or the share market is known as ‘opportunity risk’.
On the other side of the coin, the longer you hold onto land, delay a project or hold off on selling stock, the more you open yourself up to the natural risks of the real estate market.
Whether the vacant land you purchase has a DA or not, you shouldn’t consider it as a appreciating asset in a real estate context.
You should look at as a business owner looks at selling goods: business stock.
You’re turning the stock into something that can be marketed and sold at a later date in order to generate a profit.
Banks aren’t into speculative investing or borrowers who plan to simply hold onto land and take advantage of potential market growth by selling at a later date.
The only exception to land banking is when it comes to commercial vacant land but this is only acceptable with some lenders.
Who should I have on my team?
First and foremost, ensure the builder you’re working with is reputable and has experience in building residential properties of this size.
Choosing the wrong builder can result in work that isn’t to code and massive delays in construction that could cost you thousands.
That’s not to mention the fact that some builders are more than happy to take advantage of first-time property developers.
Other key people to have on your team include:
- A solicitor.
- An accountant (they can help in setting up ownership of the property, whether it’s in your name, a company or a trust).
- An architect.
- A surveyor.
- A town planner.
- An engineer.
- A real estate agent (you should do your own due diligence on comparable sales but an agent can help).
Your exit strategy
Are you planning on keeping one of the properties?
Once the development is complete, you may decide that you want to hold on to one of the premises as an investment property.
If there is enough profit from selling the other one or two properties, you may be able to buy the property without the need for a home loan.
If there aren’t enough funds, your mortgage broker can help you refinance the property to an investment loan so you can pay out the development loan.
Also, check out the ‘Building and construction – residential premises’ page on the Australian Taxation Office (ATO) website for information regarding tax implications when selling a property in a multi-dwelling development.
For example, you’re liable for the Goods and Services Tax (GST) when selling one of your units and dwelling but you calculate the GST owed using the margin scheme and save on this tax cost.
You should seek tax advice from your accountant and financial advice from a financial professional to ensure you’re making an investment decision that works best for your financial situation.
Do you need a residential development loan?
Call us on 1300 889 743 or complete our free assessment form and we can let you know if you can get approved for a residential development loan!