Put simply, every deal is different and needs to be assessed on its own merits. But there are some key figures that private lenders will look at more closely when deciding whether or not they will approve a loan for a reno or development.
Why is a feasibility so important?
To improve your chances, one of the most important tools in your arsenal when looking to secure private funding is a feasibility. This document will outline essential numbers such as:
- The purchase price and associated purchasing costs of the property in question,
- Holding, renovation/ development/ subdivision costs;
- Finance required and interest rates being charged (this will include any mainstream or private lenders and money partners);
- Sale price and associated sale costs;
- And your overall net profit figure expressed in both a dollar value and percentage ROI.
What I would suggest is you explore all variants of your proposal based on the different scenarios available to you, to ensure you are pursuing the most profitable outcome. It will become quite apparent which option will produce the most lucrative results.
What figures should I use for my construction contingency percentage and private lender interest rates when doing my feasibility?
When working out your feasibility, factor in a contingency of 10% for construction costs. This is the minimum requirement being used by private lenders when doing their assessments in the current market. This is largely based on the increased cost of building materials due to inflation and extended building timeframes due to material shortages which has a flow on effect increasing holding costs.
Commercial and private lending interest rates should also be worked out at 15% to reflect the reduced risk appetite of these lenders and the increased cost of money.
What is the minimum net profit figure private lenders would expect a project to return to be considered viable?
If after you have input all your relevant figures associated with your development proposal the net profit figure is very close to or above 15%, you can consider this to be something a private lender would be interested in looking at. Anything below 15% net profit will generally not be considered. If you find yourself in this position, try to see if you can reduce costs in other ways eg adjust fixed price contracts, get a reduction on the purchase price or reduce the building timeframe to lower your holding costs.
Be commercial not emotional
The sooner you get your questions answered in relation to your chosen strategy, the quicker it will be to get your deal across the line. So to, is it important to remain objective and unemotional when structuring your deals. Don’t force an outcome just because you want it to happen.
- Be objective – rational thought instead of irrational emotions;
- Be numbers driven – let the number talk and decide;
- Seek feedback quickly and adjust – take in all the feedback, be flexible and adjust when needed;
- Be patient and calculated – remove the need for instant gratification and eliminate impatience. Measure twice and cut once;
- Stick to the system – Thinking strategically: Navigate with logic, not emotion.
Have your Information Memorandum ready to go
Should you feasibility pass muster, you will then need an information memorandum to accompany it. This document is important as it will give the lender confidence about you, your project, your team and the expected outcome and how you came to this conclusion. Typically your IM will include:
- A comparative market analysis for comparable properties for both the purchase price and sales price of the finished product/s. This will help the lender see if your figures are actually representative of the market and in turn, reflect your expected sales expectations.
- You should also secure a minimum of 2 agent market appraisals for both the purchase price of the property in question and the finished product.
- Your experience, including any technical expertise you bring to the table, your property investment history, renovation or development projects;
- Who will be involved ie builder, trades and their commercial resumes.
- Market growth charts for the area, including medians, price averages;
- Demographics – including population ages, family size, incomes etc;
- A site map which includes things like schools, major transport routes, shopping malls, basically anything that will attract buyers to the area and your property to show proximity.
If you are considering private lending as part of your property strategy then please contact us via the link in the comments and description sections.
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