How subdividing can double your money: Part 1

Instant equity doesn’t mean over night success. It’s a term used for equity gains within a twelve-month period.

One strategy that is great for instant equity gains is subdivision. Many property investors shy away from subdividing a property as it can be time consuming and “scary” for unseasoned property investors. However, with subdividing it’s very possible to boost your portfolio significantly by subdivision in a very short time!

Warning: Subdivision is not a strategy for the weak hearted! It can be very stressful so insure you do your due diligence and are fully prepared before you begin.

STRATEGY: SUBDIVISION

Why subdivide?
Subdividing property is a great way to boost profits. When you divide one property into two or more you’ve added value to the property simply by registering the new lots.

Once you’ve divided them you can:
? Hold the lots and wait for an upswinging market
? Develop them by adding another property
? Sell one of the properties to reduce debt on the remaining or for some extra capital

Different kinds of sub-dividing
Strata title
Involves converting a single title into multiple titles e.g. splitting up block of 10 units on one title into 10 separate titles. This increases the value of the properties and it allows you the option of selling each one off individually.

Granny flat
Not every state allows for granny flat construction, nor is it suited for every market. This is why it’s important to know the area you’re investing in very well.

Second property
Involves splitting a large block of land into two or more lots and then building a new property on the vacant land.

Raw land
A process that is much more involved and very capital intensive, developing raw land requires not only a legal splitting of the property but also physically changing the use of the land.

Steps:
Step 1. Buy a piece of land
This is the most important part so don’t rush this step! Firstly decide where you wish to purchase your investment. Don’t just buy in any area – do your due diligence and make sure it’s an area primed for growth.

Council regulations cannot be ignored when considering subdividing land. Before doing anything at all, make sure that the local town planning council has policies and legislation in place that allows property investors to subdivide property.

Often vacant land can be hard to find in low-supply, high-demand areas, which are ideal for investments. If vacant land is hard to come across, purchase land with an existing building but with a large enough space to build a second home. If you find a large enough property with the house closer to the front of the property, you can build a second dwelling behind the house for a ‘battle-axe’ style block.

When choosing an area for subdivision, be sure to research the minimum lot size. This can be easily found by contacting the local council. It’s also a good idea to check into the areas demographics to discover what property styles are most popular. If you base your purchasing decisions on the areas demographics, you’ll find it easier to get tenants and to pitch to emotion-based buyers upon resale.

Consider whether you need to build before you sell. Perhaps just subdividing and selling off the second lot of land will be enough to turn a profit. Make sure to crunch the numbers before you make a decision! Also study the costs of subdivision and whether you’ll still come out in the black. Will you need to demolish the property and what are the demolition costs? Will you build one or more dwellings, and how much will it cost for the building design and construction costs?

Some things to consider when planning for a subdivision are:
• How much of the minimum block size can be covered by buildings? What’s the minimum floor area size?
• Does the council require a private open space such as a balcony or yard?
• What are the front, side and rear setbacks?
• Is off-street parking required?

Possible issues to be aware of:
• Stormwater drainage
• Zoning
• Easements (walk-ways or parking spaces)
• Encumbrances (minimum and maximum dwelling sizes or type of material to be used)
• Removal of trees (permissions are often required)

The size of the block you purchase will be dependent on all of the above! Remember, I warned you.

To do:

? Study the market drivers. If the area is in high demand and the supply is low your venture has a much better chance at success than if there’s a glut of properties in the market.

? Determine the minimum lot size by checking the Development Control Plan for Subdivision and council’s guidelines.

? Check the zoning as it will impact the size lot required to subdivide as well.

Note: In addition to lot size, access must be considered as well. Be certain you either have a lot which has two street frontages such as a corner block, or that you have enough property to create access while still keeping enough land to subdivide.

Tips:

? Be creative in your search. Learn what the market calls for; however don’t be afraid to consider ways to make your property stand apart from the crowd.

? To see if an area has potential for subdivision, check around to see if any other properties have been subdivided. While not imperative, it’s a promising sign if other property owners have successfully divided their properties.

? A benefit if other subdivisions have been done in an area is that the valuer will have an easier time determining the worth of a potential subdivision - which can potentially save you both money and headaches if a potential project would prove unprofitable.

? Bottom line - choosing the right location can make all the difference between a successful subdivision and an undesirable financial outcome.

Step 2. Put through the development application to subdivide the property.
This can be quite a hassle in itself. The applications are often state specific, so check with the local council to found out what application to fill out and what supporting information you’ll need.

Look out for my next blog which will look at how to get your development application approved and the costs of subdividing

Read more:

Buying direct residential property using your superannuation

Top 10 Perth suburb for 2015 and 2016

Property investment: A full-time job?

How to avoid property spruikers and dodgy advice

What are low-doc home loans?