Australia’s Billion Dollar Property Developer, Bob Andersen reveals the process of profitable property development.
PART 4 OF 6: FINANCING YOUR DEVELOPMENT
We’re almost towards the end of our discussion about PROFIT. In the previous installments, we’ve done the ‘P for Positioning, R for Research, and O for Obtaining Approvals. Now, we’re up to the letter F in the PROFITable Property Process Series.
F FOR FINANCE
In property development, unless you’ve got a truckload of cash, you’re going to have to get some finance.
So let’s talk a little bit about finance. Basically there’s two types of finance. There’s what we call retail finance and commercial finance. I’ll just quickly run through those.
Retail Finance
Retail Finance is the normal sort of finance that you would have used when you bought your house or when you bought an investment property. This is what you get from banks, building societies, credit unions, those sorts of people.
When you’re doing small projects, you can use what we call Normal Retail Finance through a Normal Retail Source. Small projects are typically those that are up to three lots in a subdivision, three townhouses or a duplex, for example.
Commercial Finance
Once you get a bit bigger, once you do three or four or more slightly larger project, then you have to go and get what we call commercial finance. This type of finance differs from retail finance because it has a higher interest rate.
What The Banks Need
Typically, banks have a retail and a commercial division. For both divisions, there are two things that they need: equity and serviceability. They wanted to make sure that you can afford to pay off the loan. Now, banks can lend most of the money for retail financing. They might be lending 80% or something like that.
One key difference between retail and commercial finance is that the latter can offer capitalising interest. This means that the interest is actually built into the loan. So every month, when your interest is due, they actually just take the paid part of your loan.
That’s a huge difference when compared to you reaching out in your pocket to pay the interest on your retail loan.
What You Need To Know: Creative Finance
I’ll tell you another part of finance that I love, and this is where my passion is. It’s what I call creative finance. This is doing deals with little or no money of your own. Now, I did say that banks want some equity. Creative finance is all about where that ‘some’ comes from. For that, I’ve got a whole range of strategies. In fact later on in this series, I’m going to run you through some of these strategies.
So there goes the types of finance: retail, commercial, and creative.
Look forward to catching up next time.
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