Summary: Hi, Bob Anderson here. Welcome back to the next episode in our series on successful property development. In our last episode we talked about Step 2, which was due diligence and of course financial feasibility or number crunching. So here we are, we’ve found ourselves a site, we’ve done our due diligence, we crunched our numbers, and it looks like it’s a deal. But, we’ve got to finance it. Now how do we do that? I’m just going to talk about the normal way of financing if you look through a financer. In a future episode, I’ll show you how you can use creative financing techniques to actually finance deals with very little or none of your own money. For this episode, we’ll just talk about the conventional way of financing a development project. Now, there’s actually two types of finance that we can use when we’re financing a development project and it’s got a bit to do with the size of the project. Now, what we’re going to use initially is retail finance. For small projects, let’s say projects up to maybe 3 or in some cases even 4 lots for townhouses, you can go to a normal bank. It can be one of the big four or one of the second tier banks. Now, not all banks will finance four; some will only finance maybe two, maybe three townhouses, and a few might go up to four. This is basically the rule that the bank applies. What they’ll do, they will lend up to 80% of the end value of your project. If you go back to last week’s example, the feasibility, remember you’ve got four townhouses, $500 thousand each, total of $2 million. Now 80% of that is $1.6 million so when they lend you 80% of the end value, they’ll lend you 80% in that case of the 2 million dollars which is $1.6. Obviously, you’re borrowing money from a bank, you’ve got to pay interest. Now with this is what I call retail finance. Retail finance is the same sort of finance you use if you’re buying a house or buying an investment unit. Same sort of banks, same sort of criteria. Besides lending 80% of the end value, what you have to do is you have to pay the interest but you have to pay it monthly. It’s a bit like when you’ve got an investment property, you take in a loan and each month you have to pay the interest out of your own pocket. Because you have to pay the interest out of your own pocket, on the way through the deal, now each month you’re drawing more loan because you’re spending more money on costs. So each month, your interest is rising. So just like when you buy a house, the bank wants to check what we call serviceability. They want to be sure that you can afford to pay the interest every month. They want to look at what your income is, what sort of cashflow you’ve got, can you afford to pay this interest… If you can, you’re in the deal. Now the other thing they’ll look at is obviously is you have to put in some money of your own in. We call it equity. Now how much do you have to put in? Well, quite simply, it would be the difference between the amount of money they’ll lend you and the amount of money that you need. The amount of money that you need is all your total cost for the project. There’s a bit of a gap there obviously. Between the loan from the bank and the amount of money you need, that gap is the amount of equity that you’ll have to put in out of your pocket. That can come in cash or you might have a property for instance that doesn’t have any debt on it – an unencumbered property. You can actually use property in lieu of cash. But in any event, you’ll need to put in the gap or the equity to support the finance of that deal. That’s retail finance. The other type of finance – this is the one I use pretty much always use myself – is what we call commercial finance. Commercial finance is lent by the big banks but usually it’s a different division of the bank. It’s not the normal residential or retail lending arm. They have a commercial arm and it’s this commercial arm that lends commercial finance. It’s commercial because it’s mo[...]
