Avoid These 7 Mistakes When Financing Multi-Unit Sites

Buying land with plans to build multiple dwellings requires different funding than a standard home construction project.

Most lenders treat multi-unit development sites as commercial or semi-commercial ventures, which means different lending criteria, stricter deposit requirements, and more thorough assessment of your development application before a dollar is approved. Getting the finance structure wrong from the start can delay your project by months or leave you scrambling for alternative funding after contracts are exchanged.

Applying Without Council Approval in Place

Lenders want to see that your development application has been approved or is close to approval before they'll commit to funding. Most won't provide a formal offer until council approval is confirmed, and some require final approval as a condition of settlement. If you exchange contracts on a multi-unit site without at least lodging your development application, you risk paying holding costs on land you can't immediately develop.

Consider a buyer who secures a dual-occupancy site in Hobart at a price that works on paper. They exchange contracts assuming council approval will follow within a few weeks. Four months later, the council requests design amendments, which pushes approval out another two months. The buyer has been covering interest on the land loan and can't commence building within the period specified by the lender, which triggers a requirement to reapply. That delays the build and adds thousands in holding costs that weren't budgeted.

Lodge your development application before or immediately after exchanging, and make sure your contract allows enough time for council approval to be finalised. Some buyers include a finance and development approval clause in the contract, which gives you an exit if approval doesn't come through or comes with conditions that make the project unviable.

Underestimating Deposit and Equity Requirements

Multi-unit development finance usually requires a deposit of at least 20% to 30% of the combined land and construction cost. Lenders assess your equity position more cautiously than they would for a single dwelling because the project carries higher risk and a longer build period. If your deposit or equity falls short, you may need to provide additional security or bring in a guarantor to cover the gap.

In our experience, buyers often calculate the deposit based on land cost alone and don't factor in the construction component or the lender's total project valuation. If the lender values the completed development lower than your estimated end value, that gap reduces your effective equity and may require a larger cash contribution.

Using a Cost-Plus Contract Without a Clear Cap

A cost plus contract can offer flexibility during the build, but most lenders prefer fixed price building contracts because they limit funding risk. If you proceed with a cost-plus arrangement, the lender will likely apply a higher interest margin or cap the loan amount at a conservative estimate of total costs. If actual costs exceed that estimate, you'll need to cover the difference from your own funds.

As an example, a developer in Kingston plans to build three townhouses using a cost-plus contract with a builder they've worked with before. The lender approves funding based on an estimated total cost, but materials and labour run higher than expected during construction. The lender won't increase the approved loan amount, so the developer has to inject an extra $40,000 from personal savings to complete the build. The project still completes, but the return on investment drops because more equity is tied up than originally planned.

If your builder recommends a cost-plus arrangement, ask for a detailed cost estimate with a maximum cap, and confirm with your broker that the lender will accept that structure before you sign the building contract.

Ignoring the Difference Between Construction Draws and Standard Progress Payments

With multi-unit construction, lenders release funds in stages based on progress inspections, similar to a single dwelling build. The difference is that most lenders apply a progressive drawing fee each time funds are released, and some charge separate valuation or inspection fees at each stage. These fees add up quickly across a multi-stage project, and buyers often don't include them in their cash flow forecast.

Lenders only charge interest on the amount drawn down, which helps with cash flow during the build, but you'll need enough accessible funds at each progress payment stage to cover the builder's invoice, the lender's drawing fee, and any shortfall if the lender's valuer assesses the stage completion at a lower value than the builder's claim.

Not Structuring the Loan for the Hold or Sale Strategy

If your plan is to build and sell the units immediately, the lender will structure the loan differently than if you intend to hold the properties as rentals. A construction-to-sale project usually requires full repayment on settlement of each unit, which means you'll need buyers lined up or a clear exit plan. If you intend to hold, the lender will assess your capacity to service the full debt once construction is complete, and you may need to refinance from a construction facility into individual investment loans for each unit.

Some buyers start with the intention to sell and then decide mid-project to hold one or more units. That decision can trigger a reassessment of your borrowing capacity and may require a new application if the lender won't convert the facility. Be clear on your end strategy before you apply, and confirm with your broker that the loan structure supports it.

Leaving No Buffer for Cost Overruns or Timing Delays

Multi-unit builds take longer than single dwellings, and the more units you're constructing, the higher the chance of delays related to materials, labour, weather, or site access. If your financing is set up with no buffer and the build runs over time, you'll be covering extra holding costs on an interest-only construction loan without rental income or sale proceeds to offset them.

Build a contingency of at least 10% into your total project budget, and make sure you have access to funds outside the loan facility to cover timing gaps. Some lenders allow an extension of the construction period if delays are reasonable, but others will require you to reapply or move to a higher interest rate if the project goes beyond the approved timeframe.

Choosing the Wrong Lender for Multi-Unit Development

Not all lenders treat multi-unit construction the same way. Some banks will fund up to four dwellings under a standard residential construction facility if the buyer intends to hold the properties. Others treat anything more than two units as commercial development finance and require a different application process, higher rates, and more detailed feasibility reporting.

If you apply to the wrong lender, you'll waste weeks in the application process only to be declined or offered terms that don't suit the project. A broker with experience in construction loans will match you with a lender who actively funds multi-unit projects and understands your structure, whether that's a build-and-hold, build-and-sell, or staged development.

Call one of our team or book an appointment at a time that works for you. We'll help structure your multi-unit construction finance so it supports your project from land purchase through to completion.

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