After conducting extensive research and determining viability through a detailed feasibility analysis, you should now be in a position to conduct a residual land/site value for the development you’re proposing to do. This model takes into consideration gross realisation less selling and outgoing costs, development costs, and financial costs, leaving you with the residual land value – or how much you would ultimately want to pay to acquire the development site.
Using a buyer’s agent or property firm to find, negotiate and acquire a site for you can actually save you money in the long run. Using a professional firm removes emotion, ensuring your purchase is based solely on your development project’s viability and goals.
Financing your development
Borrowing money to fund a development is very different to borrowing money to buy an investment property or even your own home. Generally, the interest rate is higher, usually 1–2 per cent higher than a typical home loan. In addition, the loan to value ratio (LVR) is significantly less than it would be for a buy and hold investment property, with banks typically lending developers 60–70 per cent for the value of the land and 60–70 per cent of the value of construction costs. This can mean you’ll need a lot more of your own cash or equity to get started, or you’ll need time to investigate other financing options.
A property option is a legally binding agreement between a property owner and a developer. It allows the developer to share with the property owner the profits of the final development, while paying the owner a higher price for their original asset. The benefit of a property option agreement is that it can buy the developer enough time – after all, time is money – to investigate the feasibility of the property and submit a development application, and gain approval before any money changes hands, thus reducing holding costs and payment of fees such as stamp duty.
Joint venture and money partners
A joint venture (JV) is a business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task – in this case a development. Joint ventures are mutually beneficial arrangements that can help you and your partners to accelerate your property wealth and grow your portfolio more quickly than you might have otherwise.
Joint ventures are quite common in today’s market, but most are successful when:
- Partners in the joint venture complement each other; in other words, a partner might have something you need – for example, capital – and you may have something they need – like development and project management know-how
- Intentions are clear – all parties need to be clear and agree on the development vision, property strategy and the project details. A project proposal should include the location, size and scale of the development. Financial information such as timing, size and length of the capital investment, as well as the targeted return, and information about any other joint venture or money partners that may be involved
- There is clarity around roles and responsibilities – each partner knows what they’re bringing to the table
- Agreements in place that spell out the conditions of the arrangement. A good property lawyer and accountant can help you navigate the process, ensuring the JV is structured in the best and most profitable way, and that tax and GST implications are considered.
If you’re interested in being a part a of a joint venture, or you’re looking for financial support for your next project, contact us today.
Getting money partners on board may be another strategy you can use to pursue your property development aspirations. Money partners are usually people who are cash-rich and who are looking to invest in solid real estate investment projects. There is good flexibility in how these deals can be structured in terms of the investment arrangement and also the return for the investor. As with any financial partnership, it’s important that both parties know how the money will be invested (strategy), how the loan or investment will be secured, the timeframe on the return and how much the return will be. Once again a good property lawyer or accountant can help you to structure the deal in the most profitable way.
Urban Greenfield is a firm believer in making profit when you purchase. To find out more about this strategy, or acquisition services in general, contact us today.