BECOME AN INVESTOR
Find out how to earn fantastic returns and put your lazy money to work by investing in property development.
When it comes to making money from property, being a real estate developer is by far the best way to make large chunks of it. Just take a look at the BRW or Forbes rich lists and see how many property developers there are. However, not everyone has the time, knowledge or confidence to do this themselves or worse they have little knowledge with no experience then mistakes are made which cost them dearly. You can however benefit hugely by investing in a project conducted by property development experts like us at Alpha Squared.
By investing in a project you can become an "Armchair Developer" where you reap the financial rewards with no time or effort required.
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After the property has been identified as a viable project it is purchased with a regular bank loan after paying a small deposit and purchase costs. There are holding costs along the way to be paid to the bank while the developer gets the Development Approval and Building Approval from the council. After it is approved, construction finance is to fund the construction phase of the project.
So to put it simply we inject the smaller portion of the funds into the project first then the bank steps in and tips in the bulk of the funds. Typically the bank will supply around 70% of the required funds which leaves 30% to be covered by the developer or an investor(s). The investor's funds could come from their savings account, equity in their home/investment property by way of a Line of Credit (LOC) or redrawn facility or even a Self Managed Super Fund.
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The role of the Armchair Developer is to supply the required cash/equity which buys them a position in the development to reap a reward. They have a passive role by injecting capital and the developer has an active role by developing the project.
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The investor loans the developer money by way of a loan agreement. They are not on the title and not on the bank loan. They take little financial risk in the project. Their reward is usually by way of an interest rate on the funds loaned for a specified term.
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There are a few variables to consider when becoming an investor so let's look at those now:
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Structure
The investor lends the required equity cash or equity to the developer so they they can borrow the balance of funds required to complete the project from a bank. The investor is not part of the project and takes no part in the outcome of the project.
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Title
The investor is not on the title. They have no direct part in the project.
Loan
The investor loans funds to the developer. The particulars of the loan are set out in the loan document between the developer and the investor. They are not on the loan between the developer and the bank.
Security
Various forms of security exist and any or all combinations can be used. They include first and second mortgages (registered and unregistered), caveats, and personal and director's guarantees.
There are several ways security can be offered to the investor. The loan can be secured or unsecured. Unsecured loans will normally mean a higher interest rate paid to the loan partner. If the developer is not borrowing from a bank at all (which is rare) they can offer a registered first mortgage otherwise a second mortgage over the property can be offered.
The type of security offered can have a direct effect on the interest rate.
Interest
The biggest influence on the interest rate is the form of security offered. The higher the risk the higher the interest rate.
Unsecured loans (offering no security) fetch the highest interest rate typically above 25%. Registered first mortgages offer the highest form of security typically 5-15%. Sometimes this is combined with personal or directors' guarantees.
In cases where a bank is involved, the investor will have to step in behind the bank on a second mortgage as the bank will always take a first mortgage position.
Second mortgages or caveats offer less security but fetch interest rates between 15-25%. Their strength is affected by the loan-to-value (LVR) of the first mortgage.
Documentation
At the very least there would be a loan agreement document drawn up by a lawyer. Very similar to a loan document you have between yourself and the bank for your home loan. There could also be a mortgage document that could include guarantees. In some circumstances, a caveat might be lodged on the title.
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Let's see how this works
Gary has $100,000 in savings sitting in his term deposit earning 0.25% monthly. Unfortunately, this is next to nothing these days with interest rates so low. After 12 months in the term deposit, Gary would have $103,041.60 in his account which is effectively a 3.04% PA interest rate. If we then take into account inflation, which reduces your buying power over time, and bank fees his savings account is going backwards!
He decides to invest in a property development project as he knows a bit about real estate and how it works after speaking with the developer. Gary is happy with their previous experience, and the due diligence on the proposed project and he reviews the loan documents in consultation with a property lawyer. The developer is offering 20% PA on Gary's money for an agreed term of 12 months with a registered Caveat.
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Gary signs the loan agreement and places a Caveat on the property title as added security, over and above the loan agreement documentation. A Caveat officially registers Gary's financial interest on the property title.
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This money is used during the project to pay for things like purchase costs, loan interest, architect and other professional fees, council fees and construction costs to see the project through to completion. The finished houses are put on the market and sold.
Gary receives regular updates on the progress of the project. At the end of the property development project, the houses are sold and everyone gets paid back their investment and then their interest/profit.
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If you would like to know more about how this could work for you please fill out a contact form below.
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