There are two big pain points rookie Property Developers share with me constantly - finding a deal and funding their deal.
And like most things in life, the better prepared and educated you are, the higher your chance of success. You might think that wouldn't apply to residential lending - you either qualify or you don't.
You'd be wrong though. There are plenty of mistakes rookie developers make that mean securing residential lending becomes a lot harder than it should be.
When Should You Use Residential Lending?
The great thing about residential lending is that we're all basically familiar with it. Chances are you've at least bought your own home with it, every broker out there handles it, it's constantly talked about in the media, and the list goes on.
What's not to love?
They're all great reasons to use residential lending! But one mistake I see regularly is rookies trying to use it for bigger projects. That's not what it's for. Yes, you can use it for developments with multiple dwellings, but once you hit 3 or 4, that's about the ceiling.
When you're starting out, that's not an issue. You can still do deals like:
So there's plenty of choices there to get you up and running! What you need to understand, though, is that residential lending is focused on holding properties for the long term. The lender makes most of their profit from having your loan on the books for many, many years, which means they'll only be interested in lending to you if they genuinely believe you intend to keep the property once the development is complete.
And right there, you have probably the biggest mistake rookie Property Developers make - and they make it in lots of different ways! As soon as a red flag goes up with the lender that maybe you're actually a developer who plans to sell at the end of the project, you're up the proverbial creek without a paddle.
Needing to be careful so you avoid hoisting any red flags up the flagpole is in many ways the best reason to use a broker. Not just any broker - one who's used to dealing with property developers. Because they've had a lot of practice in the fine art of what to say and how to say it the right way.
But if you're dealing with a lender directly, or even if you're using a broker, there are mistakes you can avoid making.
The Red Flag List
The size of the deal is the first thing. If you're looking to knock down a house and build 6 new dwellings, even the best broker will struggle to convince a residential lender that you're in the deal long-term.
Lenders also get suspicious if you don't appear to have any equity of your own. They like to see hurt money in the deal, and will be looking for it to be in your account before you actually need it.
Following on from this one, if you mention things like "joint venture" or "equity partner", you can hit the big red NO button. Developer jargon is a complete giveaway that you're a developer.
Before you even talk to a lender, putting a due diligence clause in your Contract of Sale is generally something only developers do. Now, you might be able to get around this one by saying you just wanted to make sure everything was okay before buying and developing a property with a view to keep the end product, but even so - it will raise a red flag and potentially lead to some very probing questions.
The structure you're using can also cause a lot of suspicion. While lenders accept purchases in individual names or even a discretionary trust, if the purchaser is a company, unit trust or hybrid trust, to name a few, the lender will get suspicious.
And if you are using a structure, then the name is really important. Avoid the word "Development" like the plague. The same with "Building Group". Instead, choose words which promote the illusion of long-term investment structures:
If the property you're buying already has a DA, that's another red flag. Again, you can potentially convince the lender that you're buying with a view to holding all the stock at the end, and they may accept it. Still, be prepared for questions to determine if your financial resources support that outcome.
Qualifying For The Loan
This is a whole new can of worms, and I've covered the ins and outs of improving your chances of qualifying for a loan in other Property Pulse articles e.g. Getting Finance: Plan Ahead to Make Your Application Irresistible or Top 10 Tips for Getting Your Loan Approved - so I'm not going to go through all of those here.
What I will do, though, is highlight what I think is the biggest mistake rookie Property Developers make - and that is to wait too long to switch to commercial finance.
While residential lending is great when you're starting out, it doesn't take long before it becomes a glass ceiling above your head, limiting the deal size you can do and stopping you from progressing as fast as you could in your Property Developer journey.
So while it might feel comfortable to stick with residential lending, set a goal to move into commercial lending as soon as you can, so you no longer have to try and avoid making the rookie mistake of revealing you’re a Property Developer. You'll be amazed at how that can accelerate the growth of your business!
And like most things in life, the better prepared and educated you are, the higher your chance of success. You might think that wouldn't apply to residential lending - you either qualify or you don't.
You'd be wrong though. There are plenty of mistakes rookie developers make that mean securing residential lending becomes a lot harder than it should be.
When Should You Use Residential Lending?
The great thing about residential lending is that we're all basically familiar with it. Chances are you've at least bought your own home with it, every broker out there handles it, it's constantly talked about in the media, and the list goes on.
What's not to love?
- lower interest rates
- higher loan to value ratios (LVR)
- less equity required
- long loan terms
They're all great reasons to use residential lending! But one mistake I see regularly is rookies trying to use it for bigger projects. That's not what it's for. Yes, you can use it for developments with multiple dwellings, but once you hit 3 or 4, that's about the ceiling.
When you're starting out, that's not an issue. You can still do deals like:
- land subdivision
- splitter blocks
- building at the rear of an existing property
- reno flips with or without a subdivision
- granny flats
- multiple dwellings
So there's plenty of choices there to get you up and running! What you need to understand, though, is that residential lending is focused on holding properties for the long term. The lender makes most of their profit from having your loan on the books for many, many years, which means they'll only be interested in lending to you if they genuinely believe you intend to keep the property once the development is complete.
And right there, you have probably the biggest mistake rookie Property Developers make - and they make it in lots of different ways! As soon as a red flag goes up with the lender that maybe you're actually a developer who plans to sell at the end of the project, you're up the proverbial creek without a paddle.
Needing to be careful so you avoid hoisting any red flags up the flagpole is in many ways the best reason to use a broker. Not just any broker - one who's used to dealing with property developers. Because they've had a lot of practice in the fine art of what to say and how to say it the right way.
But if you're dealing with a lender directly, or even if you're using a broker, there are mistakes you can avoid making.
The Red Flag List
The size of the deal is the first thing. If you're looking to knock down a house and build 6 new dwellings, even the best broker will struggle to convince a residential lender that you're in the deal long-term.
Lenders also get suspicious if you don't appear to have any equity of your own. They like to see hurt money in the deal, and will be looking for it to be in your account before you actually need it.Following on from this one, if you mention things like "joint venture" or "equity partner", you can hit the big red NO button. Developer jargon is a complete giveaway that you're a developer.
Before you even talk to a lender, putting a due diligence clause in your Contract of Sale is generally something only developers do. Now, you might be able to get around this one by saying you just wanted to make sure everything was okay before buying and developing a property with a view to keep the end product, but even so - it will raise a red flag and potentially lead to some very probing questions.
The structure you're using can also cause a lot of suspicion. While lenders accept purchases in individual names or even a discretionary trust, if the purchaser is a company, unit trust or hybrid trust, to name a few, the lender will get suspicious.
And if you are using a structure, then the name is really important. Avoid the word "Development" like the plague. The same with "Building Group". Instead, choose words which promote the illusion of long-term investment structures:
- Investments
- Holdings
- Assets
- Wealth
If the property you're buying already has a DA, that's another red flag. Again, you can potentially convince the lender that you're buying with a view to holding all the stock at the end, and they may accept it. Still, be prepared for questions to determine if your financial resources support that outcome.
Qualifying For The Loan
This is a whole new can of worms, and I've covered the ins and outs of improving your chances of qualifying for a loan in other Property Pulse articles e.g. Getting Finance: Plan Ahead to Make Your Application Irresistible or Top 10 Tips for Getting Your Loan Approved - so I'm not going to go through all of those here.
What I will do, though, is highlight what I think is the biggest mistake rookie Property Developers make - and that is to wait too long to switch to commercial finance.
While residential lending is great when you're starting out, it doesn't take long before it becomes a glass ceiling above your head, limiting the deal size you can do and stopping you from progressing as fast as you could in your Property Developer journey.
So while it might feel comfortable to stick with residential lending, set a goal to move into commercial lending as soon as you can, so you no longer have to try and avoid making the rookie mistake of revealing you’re a Property Developer. You'll be amazed at how that can accelerate the growth of your business!
