Gross Realisation Value vs Total Cost Ratio Part 1)

Here is a quick way you can work out the maximum available for Construction Finance:

Assume:
Land Cost $1m
Build Contract Price $1m + ($100k GST which you can claim)
Other Costs $300k (Interest, DA, s94, everything else)

Sale Prices $3.2m (inc.GST)
less $200k GST on sales

Healthy Gross Profit: $700k


Method 1) % LVR of Gross Realisation Value (GRV)

Pretty simple.
i) Valuer values the property, lets say $3.2m.
ii) Lender takes off GST = $200k GST assuming the margin scheme is applied - as you most likely will be registered for GST at this level. (Sale price - land cost = profit x 1/11)
iii) $3m ex GST GRV x 55% LVR = $1.650m maximum loan amount

$1.65m will be available to pay for the majority of development costs, including interest, $1m construction + other statutory costs. You still need to put in "hurt money" of approx. $700k of cash/equity from another property.

Method 2) LVR based on Total Cost of the Development will be explained in next blog.