Renovating or refurbishing a commercial property is one of the most effective ways to add value to a real estate portfolio. A tired office building, an outdated retail space, or a warehouse in need of modernisation can be transformed into a higher-yielding, more valuable asset with the right scope of work. The challenge is funding that work — particularly when traditional lenders are reluctant to finance properties that are not yet in their improved state.
Private lending in Australia has become a key funding tool for property investors and business owners looking to complete renovations that banks will not touch until the work is done.
Why Banks Struggle with Renovation Lending
Banks lend against current value, not future value. When a property is in poor condition — vacant, partially damaged, or simply dated — the bank's valuation reflects its current state, not what it could be worth after renovation. This creates a circular problem:
- The property needs renovation to achieve its potential value
- The bank will only lend against the current (lower) value
- The loan-to-value ratio is too high based on current value to fund both the purchase and the renovation
- The borrower cannot renovate without funding, and cannot get funding without renovating
Construction finance from banks is available for large-scale developments, but smaller renovation and refurbishment projects — anything from $50,000 to $500,000 in works — often fall into a gap that banks are not set up to fill efficiently. The approval process is slow, the documentation requirements are extensive, and the cost and complexity of construction loan drawdown procedures can outweigh the benefit for modest renovation budgets.
How Private Finance Solves the Problem
Private lenders take a different approach. By focusing on the security value, the borrower's exit strategy, and the commercial logic of the renovation, a private lender can fund both the acquisition and the refurbishment costs — or provide additional capital against an existing property to complete works that will increase its value.
At Esteb Capital, we provide first mortgage lending from 10% for commercial and business purposes across Australia. Our interest-only loans with minimum terms of 6 to 12 months are well suited to renovation projects where the borrower intends to:
- Purchase a property below market value due to its condition
- Complete renovation works within a defined timeframe
- Refinance into a mainstream lender once the property is improved and revalued at its higher worth
This "purchase, renovate, refinance" strategy is one of the most common use cases for private lending in Australia.
Structuring a Renovation Deal for Private Finance
1. Know Your Numbers
Before approaching any lender, you need a clear picture of the financials:
- Purchase price or current value: What is the property worth today, in its current condition?
- Renovation budget: What will the works cost? Include a contingency of at least 10-15% for unexpected costs.
- After-renovation value (ARV): What will the property be worth once the works are complete? Support this with comparable sales or rental evidence.
- Total funding required: Purchase price plus renovation budget plus holding costs (interest, rates, insurance) for the duration of the project.
The gap between total cost and after-renovation value is your profit margin. If the numbers are tight, the deal may not justify the cost of private finance.
2. Define the Scope of Work
Private lenders want to see that you have a realistic renovation plan — not just a vague intention to "do up" the property. Prepare:
- A scope of works document listing all planned renovations
- Quotes from builders or tradespeople
- A realistic timeline for completion
- Details of any permits or approvals required
The more specific and credible your plan, the more confident a private lender will be in funding it.
3. Present a Clear Exit Strategy
Every private loan requires an exit strategy, and for renovation projects this typically means refinancing into a bank or non-bank lender once the works are complete and the property has been revalued. Your exit strategy should include:
- Which lender you intend to refinance with
- What criteria that lender requires (and confirmation that you will meet them post-renovation)
- The expected timeline from completion of works to refinance settlement
If the exit involves selling the property rather than refinancing, provide evidence of likely sale prices and realistic marketing timelines.
4. Budget for All Costs
In private lending, all legal costs are paid by the borrower. For a renovation project funded by private finance, your total budget should include:
- Loan establishment and legal fees for the private facility
- Valuation costs
- Interest payments during the loan term (interest-only, so these are predictable)
- Renovation costs including contingency
- Holding costs (rates, insurance, utilities)
- Discharge and refinance costs when exiting the private loan
Underestimating total project costs is the single biggest risk in renovation lending. Build in buffers at every stage.
Common Renovation Scenarios in Private Lending
Office Refurbishment
An investor purchases a dated commercial office building at a discount. The property is partially vacant due to its condition. A private loan funds the acquisition and a full internal refurbishment. Once complete, the building is re-leased at market rents and refinanced on the basis of its improved income and condition.
Retail Property Upgrade
A business owner acquires a run-down retail property in a high-traffic location. The shop fronts are outdated and the building needs structural repairs. Private finance covers the purchase and renovation costs. After the works, the property attracts quality tenants on long leases, and the owner refinances into a commercial bank loan.
Industrial Conversion
An industrial property in a rezoned area is acquired for conversion to a higher-value use — perhaps creative office space or a mixed-use development. Bank finance is unavailable because the property's current use does not match the proposed future use. A private loan bridges the gap until the conversion is complete and the property can be financed on its new basis.
Risks to Manage
Renovation projects carry inherent risks that borrowers must manage carefully:
- Cost blowouts: Always include contingency in your budget. Unexpected structural issues, contamination, or supply chain delays can increase costs significantly.
- Timeline overruns: If the renovation takes longer than planned, you may need to extend the private loan term, which adds to total costs.
- Valuation risk: The after-renovation value may not reach your estimate, which could affect your ability to refinance at the expected LVR.
- Permit and approval delays: Council approvals can take longer than anticipated, particularly for heritage properties or changes of use.
A Practical Path to Value Creation
Funding renovations and refurbishments with private finance is a well-established strategy in Australia's commercial property market. When the numbers work and the exit strategy is sound, it allows investors and business owners to unlock value that traditional lenders are too slow or too cautious to support. The key is thorough preparation, realistic budgeting, and a credible plan from acquisition through to refinance.
If you have a renovation project that needs fast, flexible first mortgage funding, contact Esteb Capital to discuss how we can help structure the right facility for your deal.