Like many Australian property investors, you may hold a property that has been re-zoned or can be used as a development site; but sourcing development finance to take it from a single dwelling to multiple units is not as simple as walking into your local bank branch.
We have worked with hundreds of developers, on projects from 2-unit duplexes all the way up to 100 townhouse projects, and the success of the best projects can be attributed to following six critical rules – all coming back to sourcing better development finance:
1. Make sure you can get a development approval
This may sound obvious, but in some cases aspiring developers get so caught up in the excitement of the concept of property development, that they forget to check the local zoning and GFA restrictions. Make sure you check with your local council on this before even considering a development. No development approval, means no development.
2. Ensure the development is feasible
You must add value to your site. Why proceed if you are only going to lose money. And furthermore, why would a funder risk their money on you? Most banks expect at least a 20% return on total development costs, which also gives some leeway if there are cost overruns in your project.
3. Know your exit strategy up front
You cannot run a development on the fly; you need to determine up front what your strategy is going to be. Are you going to hold? Can your income + proposed rental support the end debt you are going to hold? Will your bank allow this? Are you going to sell? If you are going to sell, know what the bank defines as a
presale and what is required.
4. Have your house in order
Proper preparation prevents poor performance.
As with the previous points, preparation is key to a successful development. Are your tax returns up to date or do you have current payslips? Have you outlined your corporate structure; do you know what corporate entity you will use for your development?
5. Engage professionals
There are lots of people from various disciplines involved with a property development, including but not limited to town planners, survey engineers, quantity surveyors, builders, project managers, architects, lawyers, buyers agents, real estate agents, finance brokers and valuers. Is your valuer, QS or lawyer on the relevant bank’s panel?
In each of these fields, you need to ensure you are working with a specialist who understands the complexities and intricacies of property development.
6. Time for finance
The very last step in the process is approach the bank or funder for finance. You only have one shot at this, and you need to make sure you have a bulletproof proposal to put forward.
Without addressing all of the above points, you may not even receive an offer for finance at all. Again, you need to work with a specialist who understands the overall project and the wider market to match the two, and receive an offer of finance that works on terms for you, the developer, as opposed to working best for the bank.
Follow these rules and you will get significantly better results when sourcing development finance.
Jayden Vecchio is the Managing Director of Discovery Finance Group, a specialty development finance firm based in Brisbane that can assist with development funding through the major banks, private and mezzanine funders.