Finally, your project is finished and ready to market.
Now the hard work really starts!
You’ve done it!
You pulled together an A team, secured your construction finance, found a reliable builder, navigated the local council maze to obtain development approval and finally your project is nearing completion.
While some developers undertake this sometimes frustrating and undeniably challenging process to gain a sense of personal achievement, the primary motivation is, of course, to make money.
So once the finish line is in sight, what happens next?
How do you turn your development dream into real, maximum profits?
In this instalment of or series on property development, I will explain the very crucial aspects of tying up any loose ends on your project and making sure you reap the financial rewards you deserve.
I will look at subdividing and refinancing your new property, as well as the best methods of selling or tenanting your investment.
Divide and conquer
When you purchase a development site that you intend to construct multiple dwellings on, such as townhouses or apartments, it will generally come under one property title that encompasses the entire parcel of land and/or existing dwelling(s).
But once you’ve completed your project it’s ideal to subdivide the new, improved property so that each individual dwelling is on a separate title.
Consider an example where you build three townhouses on a piece of land that was originally purchased under the one title.
Obviously you have the potential to make a greater profit if you sell or retain the three townhouses separately rather than as a single entity.
This is because you are more likely to find three buyers who want one townhouse each, rather than one buyer who wants to buy all three townhouses.
The banks also see it this way and are usually prepared to lend you more against the subdivided individual properties.
This is why subdivision is such an important step when you are nearing completion of a development project.
The process of submitting a subdivision application to council is really quite simple and not very stressful if you’ve done everything correctly right from the start and the subdivision processes are much the same in each state.
In all states, developers have the option of submitting a simultaneous subdivision application with their development approval or planning permit right up front.
To avoid any such complications and the extra time and money that come with them, we tend to separate the two applications, obtaining a planning permit (development approval) at the very start and then addressing the subdivision process as we get into the working drawing stage.
Once we’ve got our working drawings in order, we will submit the draft plan of subdivision to council.
The draft plan of subdivision then needs to be confirmed by a survey on site, which can be done as soon as there is brickwork or a hard wall surface of some kind for the surveyor to measure from, to confirm that the draft plan matches up with the build product.
All of this is necessary because if council do not have confidence that what is being built on site reflects the drawings you submit, they will impose further conditions on your project and subdivision application.
In other words, it is possible to go through the subdivision process prior to construction, but it can be a costly and messy exercise.
Essentially, the goal is to try to minimise the financial exposure that comes out of subdividing your property.
So completion of the development involves the physical completion of the building, the subdivision process and correct issuing of new titles prior to marketing the final product.
Then it’s just a matter of registering the new titles with the appropriate titles office.
Show me the money
When you start on the development journey, you have to approach your lender and seek funding to get your project off the ground.
This is known as construction funding and serves the very specific purpose of allowing a developer to complete each stage of their project with the goal of producing a sellable product at the end.
Generally speaking construction funding will be short term finance that requires the loan to be settled upon completion of your project.
There are certain situations where the lender might approve a construction loan that continues upon completion, but this is not really standard practice and depends on the client and the relationship they have with their lender.
Obviously, if your aim is to develop a product that you intend to market for sale as soon as the new titles are issued to make immediate financial gains, you will settle the construction funding with your sale profits and there is no need to refinance.
On the other hand, if you plan to hold on to your new properties as long term investments within a portfolio, it will be necessary to refinance your construction loan into an investment property loan.
This is not only a requirement of your lender, but also makes sound financial sense as you will often pay a higher interest rate on a construction loan as opposed to an investment property loan.
Additionally, one of the reasons people choose property development is not only to reap the financial benefits of long term capital appreciation and also the immediate value add that developing provides.
Let’s say you’ve secured construction funding at 80% of land value and 80% of the construction cost; that’s a very different figure compared to securing borrowings at 80% of your completed project’s end value.
In other words, one loan is based on cost or the wholesale price of your development, before any improvements are made and the other is based on end value.
The beauty of this is that there is (or there should be) a significant gap in between, which is the value you’ve added through the development process.
It is this “gap” that enables you to take back some of the money that you committed to the project in the first place and use it to move forward onto the next project or investment.
Refinancing is not an overly complex proposition.
When the bank supplies a construction loan, they are lending against the security of the property you intend to develop as well as the fact that there is a construction contract in place which provides concrete proof that a new product will be built.
However when it comes to refinancing into a property investment loan, the bank will require security in the form of your newly registered titles.
Essentially, the process goes something like this; first you present your subdivision application to council for approval and then you submit what we generally refer to as “the heavyweights” (subdivision and title documents) to the land titles office.
These are then registered with the land titles office and you are issued with the individual Certificates of Title that you need to provide to your bank for refinancing, as security over the property investment loan.
It is also advisable to obtain the Certificate of Occupancy to show your bank that the dwellings they are lending against are indeed completed and habitable, as this adds to their end value.
In the final installment of this series, we consider whether you should sell or hold your project to make the most of its profit potential.
If you want to learn more about the property development process you may be interested in How To Get Started in Property Development