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Submitted by: Finance Advocates.
More and more investors are now embarking on property development as part of their overall wealth creation strategy. Among the first requirements for a successful property development is to ensure you have the right suitable construction loan.
More and more investors are now embarking on property development as part of their overall wealth creation strategy. Among the first requirements for a successful property development is to ensure you have the right suitable construction loan. It is of high importance to ensure you have sufficient deposit to protect your financial position should there be any delay in the project timeline and also in the event of a weakening of the real estate market. As a savvy investor, once you have made the decision to make embark on your next property development, sourcing a construction loan that is flexible to your needs will ensure you maximize your profit at the end of the project.
When applying for a construction loan, lenders in most cases analyze the kind of credit history you have, your assets, other incomes you might have as well as the history of your employment together with any property developments you may have invested in previously, so that they can come to a conclusion as to whether you are a worthy borrower to be approved for their construction loan facility. The ability you have to demonstrate to the lender of the loan that you have the ability to repay your debt through both the profits in the project together with your current income and forecasted rental income plays a great factor in lending. Therefore, it is usually an added advantage to have experience in property investment because this means that you can demonstrate your competency in this form of investment as well as demonstrate how you have historically profited from such an investment .
The following are some things you ought to take into consideration when considering the kind of construction loan that will suit you:
The initial deposit the lender will require you to put forward towards the construction loan. Typically when you first purchase the land each lender will have a different requirement. Some will lend to 80% of the purchase price whilst others will only lend to 60% or 65% of the land purchase. Each lender will vary in their policies based on the level of risk they?re prepared to take when approving a construction loan.
Another thing to consider is if you use an existing home loan and your home property as collateral for the approval of the construction loan. Typically if you do not have any cash to contribute towards the development project you?re only other option is to allow the lenders to cross securitize any existing properties you may have that have sufficient equity. This not only assists to tick off on the policy of the lender towards the initial cash deposit policy, but more importantly the lenders take greater comfort when there is additional real estate that they have security over.
Also consider whether the construction loan allows you have a feature known as interest capitalization. This feature allows the construction loan to include and fund any interest that would be accrued on the drawn down component of the loan. The feature of an interest capitalization facility frees up your cashflow during the term of the construction.
The purchase of a development site where the project feasibility shows a healthy profit on completion has always been an investment strategy investors are turning to for their wealth creation, but remember if you do not have finance behind you first, you don?t have a profitable project in the near future ahead of you.
About the Author: Finance Advocates Australia is the author of this article on Property Finance .Find more information, about Commercial Loan here.Visit
financeadvocates.com.au/
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