Struggling to get loan for Investment Property

Hi Guys,

I need your advice to find construction loan (245K) to build an investment house on a titled land.
I work as a full time employee earning 120K/ Year. I have two small kids (8Y and 3Y) and my wife doesn't work.
I already have settled land and looking to build a house on it.
My broker is struggling to find a lender based on my financial condition (see below). I need second opinion and looking for lender who can approve construction loan.

Salary: 120K/Year + Super
Family: Two Kids(8Y and 3Y) and wife does not work
Owner Occupied Home Loan Remaining: 312K
Owner Occupied Home Current Value (Approx): 550K - 600K
Investment Settled Land Loan Remaining: 163K
Investment Settled Land Current Value (Approx): 270K - 300K
Expected Rental: 400/Week
Cash in Hand: 35K
Construction Loan Required: 245K

The problem is when I purchased land then it had a clause that I cannot sell it. I must build within 1 year and complete construction within 2 years. This clause is killing me. Otherwise, I would like to sell the land instead of going for construction.

Thanks very much

Cheers

Comments

  • +24

    In broad terms, 120k pre-tax (single income for wife and 2 kids) to service $475k in loans is already tough, wanting another $250k makes this rather risky for an institution looking at an environment of downward prices, lowering rents and possibly higher deliquencies.

  • +11

    475 current debt, add 245.

    I'm not surprised no1 wants to let you get over 700k into debt lol

    • +1

      Isnt the value of the house vs remaining counted as a positive aka equity? Shouldnt that reduce the servicing requirements? Sorry may be a noob question.

      • +3

        Equity doesn't make loan repayments, cash does.

        Very roughly speaking, $700k over 30 years at affordability rates is about $4000/month.

        Assuming $133,200 gross income with the bonus (assuming this bonus is consistent and evident), $93,755 net income minus servicing $48k/y = $45,755

        Now, expenses for $133k family of 2 would ballpark around $4000-4200? (household expenditure measure)

        You are now -$2245/year.

        Expected rental income of $400/w gross would net around $16,640/y?

        Now we are looking at a healthy $14,395 servicing surplus.

        You didn't mention any additional liabilities which is where the above surplus will quickly get sucked up, car loan at $150/w easily adds up to $7800/year, $10k credit card/store card - $4500/y.

        Otherwise, I don't understand why your broker is struggling.

        (Obligatory your milage may vary, I'm not your financial advice/legal advice/fireman)

    • +1

      Not to mention all on a single income with 2 young kids.

      There's too much risk

  • +1

    What amount did you put down as your expenses?
    What are you interest rates for the sharing existing loans?

    $120k incl. super is about $80k post tax
    Given 2 kids and an adult dependent, this would be the main concern in terms of your left over capacity to meet the loan requirements.

    Also your expected $400 P/W rental income is future income post construction and based on the numbers looks to be negatively geared.

    • Thanks for your response. I just made a correction. I earn 120K + Super + 11% Annual Bonus.

      • +2

        banks never take bonuses into account when considering income, they can not be considered a reliable income because by their nature employers can choose not to pay them

        • +1

          Wrong. I've done 2 refinances recently and as long as I can provide 2 years worth of supporting documentation for it, it's considered.

          • +3

            @spiff: Generally Bonus is a variable component. Even a fixed bonus component has performance obligations attached to it -individual and company. In today's market most companies will end up below target so unlikely any/much bonuses would be paid. From a bank's perspective, I wouldn't be surprised if any variable component is not taken into consideration.

          • -1

            @spiff: Yep, some banks will (in fact all that I have applied via do take it into account), they generally take evidence from the last two years and will take the average of the two.

          • +3

            @spiff: My statement was based on a recent interaction with one of the big 4 who were clear they do not consider bonuses when calculating income
            Bonus for us equated to an additional 30K per year for the past 7 years and it was not shown on any documentation supplied by the bank.

            • +2

              @jimbobaus: That's fine but when you say "banks never…" it implies no bank will. Which isn't the case.

              • -3

                @spiff: Poor choice of words granted
                But when I questioned my broker about it he was adamant that little to no lenders will consider bonuses when determining income. So yes i stand by my statement. A quick google and read of a few banks faq’s and many many forum posts from customers seems to support my position also.

                • +2

                  @jimbobaus: …Multiple people have proven you wrong, but yes please continue to stand by your statement.

            • @jimbobaus: So from one bank you assume "banks never"? I have dealt with three in the last 6 months (none of them Big 4), two of them large banks and one non-bank lender. All 3 take bonuses into account.

            • +1

              @jimbobaus: Here to just add validation to @spiff's comment. I've dealt with two banks in the past and both used my bonus as long as I provided 2 years proof.

              Many people, especially in sales, are commission / bonus based where this variable component makes a huge part of their income.

      • What if you break the clause and sell the land?

        Also why did you buy the land with such a clause attached? Its doesn't make sence that you bought an asset but they don't let you sell it… why?

        • +2

          He should sell the land.
          I doubt anyone would take the OP to court to enforce that encumberence.
          With the documents showing failure to secure a loan to build, the sale would probably be allowed.

          That clause/encumberence is to stop scalping, and to encourage people to buy who really intend to build on the land.
          The OP can show intent to comply and build, and not to just buy and sell for profit.

          IMO, just sell the land and claim hardship (wife not working / no loan forthcoming) etc.
          I have seen this happen before, people selling land with this clause, and no action was ever taken.

    • i heard banks will not look at what you put as expenses, they have a certain number already fixed (which is obviously high)

      • They use the current expenditure metric which is roughly $18k iirc for a single adult as the minimum

      • +5

        The banks do look at it, but if you put less than what they consider to be the basic living expenses for your family situation (they will have a table of what they consider the basic expenses for your family size/number of dependants etc), and they will assess your expenses on the higher of those two.

      • They will have a minimum of about $3500-$4000/month for OP case (family with 2 kids). But they will go through bank statements to work out the rough ballpark value. It's better to declare it around their ballpark rather than super lowball.

  • +42

    Geez I can’t imagine why banks wouldn’t be climbing over each other to be on the hook to a single income family to the tune of 3/4 of million dollars in a recession?

    At least the banks are waking up to the stupidity in our market.

    • -4

      was that sarcasm?

  • Construction loans always difficult to get vs. a standard mortgage. Not financial advice, but I would suggest selling the land.

    • +3

      Thats what Ozb advised when OP asked same question few months back.

      • Can pretty much double down on the answers in the current climate.

    • Did you read the post?

  • +1

    The issue is you are presently at the limit of your ability to repay the loan, and that's without the construction loan.

    Even if you got your parents to put up their $2m house as surety, the banks will tell you go away. Sure there is surety but they also look at capacity to repay, which isn't possible on paper - plus those two kids, they're dragging you down financially in the next decade.

    • The single income is doing more damage than the 2 kids IMO. If he is to lose his job, the family will go balls up on existing debt, let alone any new debt

      • I guess my reference to kids is that they cost alot of money regardless, some estimate that financially it cost in excess of $250k upto the age of 18

  • +3

    Has the broker given you any indication of what they have calculated your servicing ability at? I.e. Your surplus/shortfall per month. It will give you an indication of how far off being able to get the loan. We have been relooking at finances lately to buy a second investment property and there's a hige variation in what results they came to. E.g. HSBC said we could borrow another $200k without accounting for any rental income/cost of investment mortgage. CBA said we had a $450 surplus, Suncorp said we had a $3k shortfall (I'm sure they got something seriously wrong). Banks have tightened up lending a fair bit though, and CBA were currently only using 70% of rental numbers for servicing calculations, this used to be 80%. I have taken a few steps to help, which are all things to consider (in no particular order):

    • Look at refinancing all of your existing loans - lower rates/reduced fees/longer loan terms etc can all reduce your monthly committed spend. - We have reduced monthly outgoings by $500
    • Close credit cards or limits - Increased our borrowing capacity by several hundred thousand (Had 3 cards with large limits, so dropped the limits by $35k total
    • Review all your monthly expenses, we have used some of the downtime recently to compare all our mobile/internet/insurance/utility providers etc. - Saving $175 a month
    • We're putting up solar panels as our quarterly bills were $480-640, should be down to less than $100 a quarter on average after they are up (obvious capital outlay to start with)
    • Get some advice on whether your salary is competitive in the market, if it isn't (And obviously depending on job availability/security in the current climate) see what else is out there, and see what pay rise you can get by changing jobs/negotiating with current employer.
    • Your wife not working is going to be the biggest challenge I suspect, not sure the reasons for this, but her generating income will probably make a bigger difference than all the above. We couldn't get any finance last year as my partner was on maternity leave
    • +1

      All great suggestions. Changing employment would require you to wait for at least 3 months, and depending on the industry your new job is in banks may not lend you.

      Refinancing and restarting loans for another 30 year term and closing all your credit cards will get you the best outcome. Also when you refinance maybe put all properties as separate securities, it would allow you the flexibility of refinancing part of the loans with expensive tier 2 lenders. Once the construction is finished and the property is rented out, you should be able to refinance with main stream lenders.

      • +1

        Thanks very much for your suggestions.
        I don't have any credit card. In terms of my expenses, I really don't spend on holidays and I always look for bargains even for small grocery items.

  • +20

    And this is why the property market is on the brink.

    Too many people expect rents and returns to stay the same/go up (they have for 40 years so why stop now)

    Reality is when everyone gets too greedy (property investors) resulting in fomo for first home buyers you get a hysteria that the banks were only too happy to fuel.

    Now people are expecting to get $500k+ loans on a single income based on previous rent.

    I'm sorry but the market isn't there anymore and what equity you currently have is at risk.

    Now is not the time to be leveraging.

    • Too many people expect rents and returns to stay the same/go up (they have for 40 years so why stop now)

      Capital returns (paper profits) at say 7% on say $600k

      Rental returns at say 3% on say $20k per annum

      That is a big cash flow gap on fixed 25 year monthly payment commitment

      Big problem!

  • +6

    wow. Single income and wanting to be in debt around 700k$.

    • Not really. Just wanted to get rid of this land. The problem is when I bought land then it had a clause that I cannot sell it. I must build within 1 year and complete construction within 2 years. This clause is killing me. Otherwise, I would like to sell the land.

      • Can a crafty lawyer not get you out of this clause?

      • +4

        These kind of covenants are designed to encourage people to build. However, if you are not able to get finance to build, what would happen. I would suggest that you inquire with the developer. These are unprecedented times, and Covid19 pandemic is act of God. Do you know what would be the penalty if you are not able to build. A conveyancer or a lawyer should be able to get you an extension of time.

        • I would suggest you get the clauses checked by a lawyer, Typically, the contract will obligate the completion of home construction on the property within 2 years with a right for the Developer to buy the property back, sometimes at market value if not completed.

          They put in these clauses to ensure owners construct houses so that the estate looks consistent instead of having vacant patches of land between homes. Having said that i know of many friends who have successfully negotiated extensions (2 years in one case) with the developers. They would usually comply for 2 reasons.
          -They don't want to see titled, vacant spots up for sale while they are trying to flog new releases.
          -If they cant afford to buy them back, they rather grant you extension probably with a small fee for every year you don't construct.

          The latter half of the above clause may not be the same with all developers (that they will buy the land back), but the other option where a lawyer could help you is by nominating someone else to take over the title.

      • I know I'm late to the party, but you should really consider the enforcability of these Positive Building Covenant.

        Especially whether a Positive Covenant will run with the land if you elect to sell before building.

    • Mind explaining why that is a problem? I don't really understand. ~$2000 per month principal repayments over 30 years, for the biggest and likely lowest risk investment this guy will ever make in his life, with low interest rates, what's wrong with that?

    • +25

      I think you're disregarding a few things.

      1) Equity in property
      2) single income - so if you split his income it would be comparable to both being on approx 55k due to the additional tax you pay at the 120k bracket
      3) plus he is servicing two kids.

      I'd say he's doing pretty well financially and most certainly he does not need your judgement

  • +1

    Looks like you need to adopt a foreign investor in need of a Visa.

    • Or put the kids up for adoption instead.

  • Did you talk to the developer? I did a similar thing , purchased vacant land in an estate and I know some people sell their land once it titles due to change in their circumstances

    Just chat with the developer to see if they can make an exception, they'll likely ask why so just be prepared to explain.

    • +1

      Developer always says ask your conveyancer to talk to our conveyancer and in a nutshell we would allow you to sell land but not to others. We will purchase your land and pay you less than what you paid 2 years ago. This taught me unforgettable lesson in my life :) Never sign a contract which has that many clauses :)

      • Another option is just hold the land for now till you're ready to build, also might be able to get an extension on when you need to finish construction by, maybe can push out by 6 months

        You'd be paying interest on the land though

      • +1

        What happens if you don't build in the timeframe given? How much less are they offering you?

  • +2

    Your $250k land purchase has increased already to $270-$300k, so you are making a substantial profit already, or you are overestimating the land value.
    Do you need to spend $250k on a build? Is there a more modest house you can build?
    Can your spouse get some work to increase you incomes?

    • +7

      He’s valuing it to what he thinks it worth. He’s in for a rude shock if he actually get it professionally valued.

      I’d be very surprised if much vacant land over the last 3 years was making 7% PA.

    • Yes it was purchased in 2017. 430m2 block in Melbourne Western Suburb. Paid 245K. The same size blocks are being advertised as 300K+.

      • +3

        Great. If that’s how things work I’ll just slap a sticker on my old Datsun and list it for 300K on car sales. Because if that means all Datsuns are worth 300k right?

        Unless a reasonable volume of properties are transacting are that value you can’t just list what people are advertising their land at.

        • +1

          Couldn't agree more, the market is slow to respond to value downgrades until it goes into freefall and everyone is trying to urgently sell. At the moment it's rosy but I feel in a couple of months prices in Melbourne and Sydney are in for a large correction. The ones hardest hit being those on the outskirts in new estates in the middle of nowhere

  • What happens if you don’t finish the build in two years?

    • +1

      Probably in one of those clauses.

  • Can you get someone else to invest with you so you don't require the full $245k.
    Other alternative is to sell the property off the plan….so you have someone else on the hook before you take out the loan.

  • +1

    Investment Settled Land Current Value (Approx): 270K - 300K

    If you're contractually unable to sell the land… isn't the value technically $0? Without a house built on it — you don't have an asset. Without the money to build a house; you're in a real pickle.

  • I'd suggest finding someone who would partner with you to build on the land (who is able to get a loan) . You'll take less profit than if you went it alone, but at least be able to do the build.

  • +2

    can't you put a $30k container house on the land and call it a day ?

    • A lot of areas have covenants which set out minimum building standards; this mightn't be an option.

  • +7

    Tell your wife to work

    • Wouldnt help him because she would be on a probation for 3-6 months (and thats if she started working tomowwo) im assuming he needs the loan sooner then that and banks will basically not accept a worker in probationary period

  • Cant get a loan - Maybe I should call another Broker? NAHHHHH F**k that, Ozbargin will save me!

    Dude you have no hope from what you are saying getting an investment loan you got a truck load of debt already and have 3 dependants!

  • i wonder if developers can force to buy back the land from the buyer if clauses arent met, but at a much lower price.

    • They can, that clause was in mine when I bought land. If I remember I think they can buy back at 10% lower than what you bought it for

      • Yes, but selling land to the developer doesn't seem feasible option. For example, the price I paid in 2017 was 245K for 430m2 block. Even in tough financial market it is 270K min. So selling this land to the developer for 235K + interest + council charges paid would go down the drain. Developer has advertised same size block for 300K+.

        • +3

          It is worth doing that than loosing more or even getting a loan at this stage from the looks of it.

          Also from your last few posts looks like this is been going on for a couple of years now. $20K gift from a friend.

  • +4

    There should be dodgy brokers as long as you know what you are doing and confident in meeting your obligations.

    Wife should be employed given your situation and that should be a priority.

  • +1

    All that debt.

    Not financial advice, but putting all eggs into one basket (i.e. you) to pay for eggs that you do still have to pay off, and then ask for more eggs to pay off seems like a one way ticket to pain for a bank in the current economic climate.

  • Can you build a small garage on it?
    Technically something is built on it right?!
    I’m sure someone else can figure out a good idea for a loophole.

    • Nope, developer has quite strict building requirements. For example, they require Low Profile Cooling unit not an ordinary cooling Unit.

  • +1

    I must build within 1 year and complete construction within 2 years. This clause is killing me

    Who governs this and what are the ramifications of it not happening? Is this documented anywhere that there are fines or fees or just stated in the contract? If it is Torrens title, the developer doesn't have much chance of claiming this (and like most developers have probably gone out of business as soon as the last block was sold - assuming there was a developer). So the only other group that could claim this is the local council, and you probably have many avenues for avoiding or delaying it.

    I have had a piece of land that had a 2 year build clause and I've owned it for 10 years (and it was previously owned for 4 years before that). The developer no longer exists, so who looks after the covenant? The council have never said anything.

    There isn't much anyone can force you to do really in this timeframe. And then you can just blame the coronavirus or lack of financing or a bunch of things if they do try.

  • -1

    Hi
    A lot of "advice" and opinions here and most mean well, however not all banks are the same.

    All banks have slightly different criteria, guidelines, acceptable and unacceptable income and measurements and weightings. Also continually variable.
    Also, banks appetite for certain types of loans, equity, lender etc. continuously vary and differ from bank to bank. Less now than in the past but still meaningful variances.

    Your situation "construction loan" and "investment loan" requires a knowledgeable broker in BOTH; they are very different from conventional loan for a POPR…
    a Broker to manage this for you starts at structuring all your loans moving forward then set the application to the most suitable Banks re your situation and loan type and then managing drawdowns on construction etc. etc. and this is a simplified summary.

    I have been investing in property for 25 years; a substantial challenge is to find brokers with real expertise in investing. You need construction loan experience, and very ethical and will work hard for you.

    I might have a Broker in Melbourne I could recommend, though will chat to him before plastering on a public site hahaha. Is there a private message option here?

    • Is there a private message option here?

      There is, however it seems both you and the OP have disabled the private messaging function

  • +1

    Funny enough this is what greed does to housing at newer estates/ suburbs. Wasn't such a precedence on the news couple of months ago as well, where people have bought multiple untitled blocks of land for $25-30K each in deposit hoping the price would go way higher. But now they don't have the funds to get out of it.

    • +1

      Yep, reddit is full of such stories..

  • -3

    Not financial advice or actually advising you to do this but have you tried stating that you are "single" instead of having 3 dependants?

  • +2

    You are the epitome of why we have such a huge housing bubble in Australia in this century.

  • +4

    $120k single income with three dependents and almost half a million debt?

    Mate I'm not sure you've run your own numbers here…

    • LOL you know the stats are something like 85% of all property investors have 1 property and another 85% of them are on lower / lowest tax bracket. The best one is on the ABC news report that someone lost 20% of their salary due to COVID19 and wanted to ask the landlord for a cut until they realised the landlord makes less money than they do (after the cut I assume).

      Capital gains on property is just people bidding it up for everyone else. Notice how you can't sell and get back into the market after all the costs of selling and stamp duty on the new purchase.

  • Get the wife back to work then this is easy.

  • +1

    According to your other thread you bought this land in 2017 so it's been over two years already. If there's a two year limit to begin construction how is it you've exceeded this?

    • He bought it in 2017 but it didn't title till last year. The 2 year period doesn't kick in until titles (ie land settlement)

  • You need a good broker. I'm 1.5mill in investment property debt and work as a teacher. Been amazing and I want more debt!

    http://www.asapfinancial.com.au/

    Has helped me a lot.

  • The bank is expecting property market to drop. So whatever that is build now the value will drop at least in the near future. Get a builder license and start building something.

  • Big investment, and numbers not addin up. Not having a go at you personally, but seems to be the general public's mentality - investment property like playing monopoly.

    If any credit card/car loan, pay those down first. Will make the number slightly better.

    Refinance current home to get as much equity out as you can. See what the ultimate difference is.

    Lastly, build the cheapest dwelling you possibly can just to satisfy that clause in the contract to minimise loss - assuming there will be a penalty clause in place for not meeting that particular contractual term.

  • Wife needs to work.

  • Just thinking out loud and not advice… see accountant and lawyer.

    How much did you pay for the land and how much does a newly built ones selling for? Is there profit if you build for 245k? Don’t forget about gst on new homes.

    Have you considered bringing in a joint venture partner to service the new loan for the build and sell the new property. Split profits.

    Alternatively maybe you can refinance your home and then borrow the rest via private finance to build then sell?

  • Hope the issue has been sorted given it's been a few months since you posted this..

    But if you haven't landed on a solution you need to seriously get a much more capable broker. if you could increase your savings to 12-20% of your construction price and have the rest as loan, there are a few good options out there for construction loan. The trick is to get a lender that recognises expected rent as an additional form of income.

    My broker is amazing at finding the right lender depending on one's situations. I have 4 loans done through him so far, and a few other friends who engage his service too. Please PM if keen.

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