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