How do you seek and secure property development financing? Australia’s Billion Dollar Property Developer, Bob Andersen, share his expert tips.
Hi, Bob Andersen here. I’m back to talk about property development.
A very important thing regarding property development is to get finance—that could almost be one of the most critical things. When it comes to getting property development finance, I just like to run through some of the questions that you could ask. In fact, you need to know the answers to these things. Whether you’re dealing directly with a financier or a bank, or even if you’re working through a broker.
TYPES OF PROPERTY DEVELOPMENT FINANCING
There’s basically 2 types of finance when we’re doing property development. One is what we call ‘retail finance’, it’s from your own retail bank. You use it when you’re doing small projects, let’s say up to perhaps 3 townhouses.
There’s a few basic things you need to know:
The interest rate, the application fees—what we call the ‘upfront costs’
How the valuation is going to be done (the cost of the valuation)
The lending limit (how much you’re going to lend) that could simply be a percentage of costs or the end value.
We need to know those in order to calculate the size of our loan.
When we’re doing slightly larger projects, maybe 3 or 4 or more, we can use what we call ‘commercial finance’. That’s a little bit more complex. Some of the basic things we need to know are interest rates. It’s not always simple as just quoting a number, because sometimes they break the interest rate into components. Things like line fees, the actual rate, and he base rate.
You have to add up some components sometimes to really get the real number of the interest rate. We want to know the lending limits and how they are calculated—it could be as simple as it could be a percentage of the total cost.
They also like to look at the percentage of the ‘gross realisation’ (the sum total of the value of the project)—in other words, the sale price added up. They might work up a percentage of that. In fact, some banks look at both and go for, what would you expect, the lesser? So that’s for the lending limits.
PROPERTY DEVELOPMENT VALUERS
Also, valuers. When you’re doing commercial finance, you’ll have to get a commercial valuer. You can ask them, “Who’s on the panel? Which valuers are on your panel?” and they’ll be happy to tell you, then you’ll have to make a choice there as well. Interest is what we call capital as normally with commercial finance, but you must need to make sure that’s the case. In other words, you don’t have to come up with the interest every month out of your pocket, they actually write the interest component into the loan, and that certainly helps with cashflow on the way through.
Establishment fees is another thing, it would be more expensive than retail. Normal banking could run at half the percent of the loan. All of these costs do add up, and you need a quantity surveyor a little bit down the track when you’re finalising your commercial finance package. Once again, you can find out who’s on the panels as well.
We have quite a bit to finance. My recommendation with finance is when you’re starting out, get yourself a good broker. Work with the broker, learn from the broker, but get them because they know the right contacts. It’s very important to know all the little pieces that add up in your finance package.
Property development financing is probably the most important thing you could ever get, ask all the right questions, and get a bit of help from a broker.