My Finance Thumb Rule

How much money (equity) will I need to start developing? Learn more from Bob Andersen.

My Finance Thumb Rule

A common question I get from someone looking to start their first development is “How much money (equity) will I need”?

If it is a small project such as a duplex, you can use retail finance the same as when you bought your house.

It varies from bank to bank, but your equity could end up around 20% – 30% of the end value. However, serviceability is a big ‘must have’.

With commercial finance, it is a bit different. They are more likely to lend a percentage of total development costs (TDC).

To work out the equity you would have to put in, here is a quick thumb rule:

Equity = GRV x 100/120 x 0.3

GRV (gross realization value) is the selling price of your project.

We are looking for a 20% ROC (return on cost) ie profit as a % of costs.

The bank loans 70% of TDC so we put in 30% as equity.

Here is an example for a 3 townhouse project where the townhouses sell for $600,000, we want a 20% ROC and the bank lends 70% of TDC.

E = $1,800,000 x 100/120 x 0.3

= $1,500,000 x 0.3

= $450,000

So to finance this whole project we need to put in $450,000 equity.

1Comment
  • Ross Colledge
    Posted at 14:57h, 23 March Reply

    Thanks Bob.; This makes it simple to calculate.

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