The financing strategy will depend on number of factors including the size of the project, whether it’s for ownership or rental, and what kind of social impact the project will have.
Redeveloping the family home
If you’re redeveloping your family home to accommodate an extra household or two, the process of getting a loan will probably be similar to financing a conventional home improvement, with some caveats. First, you need to check with your lending institution whether your project qualifies for a home loan or whether development finance will be required. Secondly, if the improvements are considered too unconventional, this might affect lending criteria. Proposing separately titled units will generally be considered a positive, but using an unconventional title like Company or Cooperative title is likely to affect lending criteria. Seek tailored financial and legal advice.
Mortgage brokers are a good place to start as they have the knowledge and contacts to connect you with lenders that might suit your situation. Look for brokers that are members of the Mortgage & Finance Association of Australia or the Finance Brokers Association of Australia.
Co-buying to redevelop a property
If you’re part of a small group that’s buying a property to develop into collaborative housing (say for two or three households), some banks offer a co-borrower home loan option. This allows borrowers to purchase property together as tenants in common whilst keeping their finances separate. Borrowers have to guarantee each other’s loans. Independent financial and legal advice and a tailored legal co-ownership agreement are essential. Also see ASIC’s guidance on loans involving family and friends.
Shared equity models
Shared equity financial models allow residents to have a stake in their home without fully owning it. They help households with lower or variable incomes to enter the housing market. Some collaborative housing projects are exploring this as part of their goal for a diverse community that can welcome households on lower incomes. An equity partner shares ownership of the property, using a financial model that supports the household to eventually achieve full ownership. There are various shared equity schemes operating in Australia.
Financing larger projects
Households participating in larger projects will require the services of an expert development manager to help put together finance. The group will typically take out development finance to cover the cost of land acquisition, design and construction. In Australia banks will only lend to a single entity, so households form a company to hold the land in trust and give power of attorney to the development manager throughout construction. Households will typically need to contribute substantial equity (around 30-40% of development cost) at land acquisition stage. Equity contributions can be reduced by partnering with equity investors who will expect a return. At completion the homes are typically given individual ownership titles and households then seek conventional mortgages to pay out the development loan. See more about financing developments here.
Financing rental projects
A ‘build to rent’ model with long term leases could be a suitable pathway for collaborative rental housing. Investors own the asset and finance land acquisition and development, in return for a guaranteed rental income stream. The long term leases give both tenants and investors security. Rental collaborative housing for low income households may also be financed by community housing providers.
Projects with a measurable social impact may want to explore impact investment as part of the financing strategy. Impact investing is a growing field of investment that targets organisations and projects that deliver positive social and environmental impact alongside financial return. Impact investment can really help in cases where conventional finance is hard to obtain, or to reduce the equity contribution required of households. It is also offered at a lower rate than conventional finance of the equivalent tier. Impact investors can also bring in other finance partners to a project (syndicate lending). See here for more on impact investing.
Dealing with the high cost of land
For many projects, the cost of land is a significant hurdle. If a landowner is willing to defer settlement of land purchase until construction is ready to begin, this can be an effective way to help projects get across the line and reduce risk to households. Long term (99+ year) ground leases are another option being explored in situations where land costs are prohibitive. See acquire land for more.
The value of partnerships
If you’re a group that includes households on low incomes, explore partnerships with community housing providers, housing cooperative managers, government authorities and impact investors to help make your project happen.