Land to Expand?

Question from Paul updated on 11th November 2011:

I currently have two investment properties with three income streams at one bank, the loan-to-value-ration (LVR) is 83%, and they are cash flow positive bringing in $80per week. I have a mortgage on my own home at another bank, with the LVR at 80% - I'm currently adding value through renovation. I would like to purchase some bare rural land and build our own home, ideally keeping our current home as part of the investment portfolio. The end result would be three investment properties, four income streams (we're planning to add a house to one property in time), with our family home in the countryside. I'm looking for ideas and workable solutions.

Our expert Kris Pedersen responded:

With the understanding that I don’t know your income position outside the rentals my thoughts are as follows. Firstly note that with bare land the LVR that banks are willing to go to differs greatly depending on the land size, whether services are connected to the site or not and whether the land is considered rural or if it is quite a large bit of land, 10+ha, then you could only be looking at 50% lending.

If there are no services connected then you also will be looking in most cases at 50% LVR. The banks are also generally wanting 20% of the build cost put in meaning that with your stated current LVR you probably don’t have enough equity to commence this project at the moment.

Note also that from a servicing point of view, builds can cause issues as in most cases lenders will assess the whole new debt being taken on against you but not include the rental income that you will get when you rent your current owner occupied property out.

I am inclined to suggest that it may be worth running the numbers first on the additional dwelling you talk about above on the property that you already own. If this can be built now then you may get enough of a development margin to increase your equity levels and get you closer to your stated goal. From a mortgage and asset structuring point of view also note that when you can achieve your goal i’d generally recommend splitting the investment lending away from the owner occupied personal lending by using more than one bank.

Kris Pedersen of Kris Pedersen Mortgages is a commentator on property and finance. His team sources top finance strategies. www.propertyfs.co.nz

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