Duplex development: how do you pay?

Many homeowners consider redeveloping their property, especially when they see similar projects happening nearby. However, with construction costs continuously rising, how do you know if you can afford it? And if you can’t, what are your options?

Representation of a townhouse development (created by AI)

This blog explores various ways homeowners can use loans and investments to finance their home redevelopment projects. At Flippable, we're developing a service to help homeowners redevelop their homes. We're keen to hear your feedback: is funding a key challenge for your redevelopment ambitions? What kind of service would make this process easier?

Cost Considerations

Building a duplex can cost upwards of $2 million, or about $1 million per dwelling. Additional costs may include consultant and legal fees, council contributions, planning and design expenses, interest costs, and real estate agent fees. Despite these costs, the investment often proves worthwhile depending on the land's value and potential revenue from selling one or both dwellings. So, how can you fund these expenses?

Funding Options

1. Cash

• Pros: Using savings avoids interest costs and gives you full control over your project without needing approvals from lenders or investors.
• Cons: It's risky to use a substantial portion of your savings, and there's an opportunity cost, i.e., the potential returns from alternative investments.

2. Loans

• Types: Debt funding from bank and non-bank lenders is common for financing residential developments. Residential development loans are typically for projects with up to four units, while larger projects require commercial loans.
• Terms: Development loans are short-term and funding is released in stages based on progress.
• Approval: Focuses on the project's feasibility and profitability. Smaller loans might require a serviceability assessment.
• Rates: Bank loans offer lower interest rates but have stringent approval processes. Non-bank lenders have higher rates but fewer requirements. Loans can cover 60-80% of the project's value.

3. Mezzanine Debt

• How It Works: Mezzanine lenders provide funding to cover the gap between senior debt (e.g., a bank loan) and equity available to cover the total project cost. It is subordinate to primary loans but ranks higher than equity investments in the repayment hierarchy.
• Pros: This type of financing can reduce the amount of equity required from the homeowner or other investors.
• Cons: Mezzanine debt is typically more expensive than senior debt due to its higher risk for lenders.

4. Investors

• Equity Investment: If you can't fully fund the project, equity investment can fill the gap. Investors might demand higher returns, but this option can work if the development remains profitable despite these costs. Repayment is typically tied to project profits, unlike loans which typically need to be serviced monthly.

5. Joint Ventures (JVs)

• Definition: A JV with a landowner usually involves partnering with developers or builder-developers, sharing resources like land, capital, and expertise.
• Example: Some builders cover development costs while the landowner provides the land. Post-construction, each party might retain one side of the duplex. This reduces financial risk for the landowner but requires profit sharing and potentially less control over decisions.

Factors to Consider

• Deal Clarity: Ensure you understand what each party gains from the deal. Equity and loan terms are usually clear, but JVs can be more complex. Visibility of all costs and revenues is crucial.
• Finding Loans: Not all mortgage brokers specialize in development loans. Word of mouth can help you find a knowledgeable broker.
• Debt Affordability: Consider how much debt you can afford, given lender approval requirements and the need to pay interest (whether monthly or on completion).
• Sourcing Equity: To supplement debt, you can seek equity investors. This can involve family, friends, Facebook groups, crowdfunding platforms, property investment funds, or real estate investment clubs.
• Due diligence: finance partners will want to be satisfied about the project’s feasibility so it’s important to understand all costs, be realistic and, as much as possible, control costs and manage risks.
• Time value of money: Keeping the development on track is essential to minimise interest costs. Prefabricated housing, for example, though potentially more expensive upfront, offers quicker timelines and more certainty than traditional builds.

Is Financing a Challenge for Homeowners?

For homeowners looking to redevelop, navigating the complexities of funding can be daunting. Would a service that simplifies this process be beneficial? At Flippable, we aim to make it easier for homeowners to redevelop their properties rather than selling to developers or entering unfair partnerships.

Are financing challenges holding you back from redeveloping your home? Share your thoughts, and let’s explore the future of property development together!

Tell us which services you need

Flippable is building a service to help homeowners redevelop their own homes. We want to make the process as simple and risk-free as possible.

We are building our service now. Complete a short survey to help us decide which services to build first.