Finance to build newbuild units

[ak22]

Hi all. Just trying my luck if anyone can share their views/opinions/suggestions on banks approving loan to build units on a section? We have a 900 sqm land with stand alone house being rented to good tenants. Long term, not sure if feasible or not, at this stage, our goal is to build 4 or 5 2 bedroom units ie knock down the current house.

i just don't know where to start on the process. How will a bank look at this type of investment? Is this still subject to a newbuild loan? Cheers

[Nick G]

Probably but there might be a commercial lending aspect to it with the higher number of units. Do you have a broker? I wouldn't go direct for this and I would look for a broker who has secured funding for similar projects.

[annie brookes]

I did almost exactly what you have described. Old house on 940sqm rented as three. Difficult to maintain and decaying. Knocked it down and built 5 x 2 story 2 bedroom (2 bathroom too - important that). Finished 4 years ago.
Best decision I ever made and would recommend taking the plunge.

[StreetView]

I did almost exactly what you have described. Old house on 940sqm rented as three. Difficult to maintain and decaying. Knocked it down and built 5 x 2 story 2 bedroom (2 bathroom too - important that). Finished 4 years ago.
Best decision I ever made and would recommend taking the plunge.

Hi Annie, can you give us some more details why this was the best decision you ever made? Could you include the original cost to buy the house, cost to demolish and build, and what the current value, equity and rental amounts are.
Thanks

[annie brookes]

Hi Annie, can you give us some more details why this was the best decision you ever made? Could you include the original cost to buy the house, cost to demolish and build, and what the current value, equity and rental amounts are.
Thanks

Hmmm that's quite a bit of personal financial stuff!
Also costs then are certainly not costs now. Nevertheless to give you an idea. All up demo plus earthworks plus build to a finished state $1.5m in 2013. Land value was $700K at the time. Rentals started at $620pw and are now low $700's.
Best decision because the old house was only getting older and grottier without major structural and refurb work and even then would still be an old house. Plus the land was underused so there was never going to be much return from it. More importantly we were sliding down the tenant food chain because most top end tenants want everthing new, nice, clean, modern. So would I. So building new effectively re-positioned ourselves in the market. Built to high spec - DVS, heat pump, not too small nice appliances. Means you get to choose your tenants to match. There is a market of professionals who want to rent because of only being in the city for a year or two and they find it hard to get somewhere nice. Two bathroom means you can rent to a couple, couple plus random or two couples and it can work well.Hardly had a day of down time in 4 years and not one tenancy issue. Everyone happy. The risk of course is the loan to build and weathering the holding cost until its all finished but with progress payments its not as hard as it looks up front. It will be harder to get a builder now. Plan on 2 years start to finish and $40K ish upfront for architects, quantity surveying, planning and consenting before you go to the bank with a contract to build

[StreetView]

Hi Annie,
Apologies if my questions were too direct.
Thanks for the information. Looks like you have done well. Your yield must be about 12 per cent.
Thanks again and kind regards,
StreetView

[ak22]

Hmmm that's quite a bit of personal financial stuff!
Also costs then are certainly not costs now. Nevertheless to give you an idea. All up demo plus earthworks plus build to a finished state $1.5m in 2013. Land value was $700K at the time. Rentals started at $620pw and are now low $700's.
Best decision because the old house was only getting older and grottier without major structural and refurb work and even then would still be an old house. Plus the land was underused so there was never going to be much return from it. More importantly we were sliding down the tenant food chain because most top end tenants want everthing new, nice, clean, modern. So would I. So building new effectively re-positioned ourselves in the market. Built to high spec - DVS, heat pump, not too small nice appliances. Means you get to choose your tenants to match. There is a market of professionals who want to rent because of only being in the city for a year or two and they find it hard to get somewhere nice. Two bathroom means you can rent to a couple, couple plus random or two couples and it can work well.Hardly had a day of down time in 4 years and not one tenancy issue. Everyone happy. The risk of course is the loan to build and weathering the holding cost until its all finished but with progress payments its not as hard as it looks up front. It will be harder to get a builder now. Plan on 2 years start to finish and $40K ish upfront for architects, quantity surveying, planning and consenting before you go to the bank with a contract to build

Thanks Annie for the insight. That's what I've been trying to weigh as well, the cost of building now vs the cost of building in 5 years time. In the meantime, I may have to ask a broker (as suggested by Nick G) to give me an idea on what's at stake for this type of project and probabaly talk to some local builders. Manawatu has been on a shoot up with all the new builds lately and the quotes I have been getting with a stand alone house are way above what I've expected. Anyway, thank you for sharing.

[DaveW]

Hi Annie, Did you unit title each of the units or were they all built on one title? The first option would be much more lucrative,

ak22, after construction you would then obviously be able to refinance and pay back the original construction loans.

[annie brookes]

All on a single title. No subdivision or unit title costs nor body corporate. Also I have no intention of selling so not really concerned about maximising the capital value. The down side of course is that you cant flick off one or two for some cash in the meantime but you can always title it later but if you do you create the body corporate issue. The construction was done as physically separate houses with separate services so it can be done in the future.

One day my kids might unit title or subdivide it if they want!

[Don't believe the Hype]

The other thing to consider with subdividing later is the bright line test starts when the new title is created. I believe when you subdivide the BL test is 10 yrs. if you subdivide now with the intention of keeping them but in 12 yrs time need to sell one it’s Tax free. If you don’t sub divide and in 12 yrs decide to subdivide and sell. You’ll have the IRD looking for their cut.

[Davo36]

Also, I think if you unit title, you have to meet the various building standards at that time.

So they may not comply in say 5 years time.