Many investors often purchase properties that have a potential for subdividing in order to generate a secondary income—and while it’s not too hard to find properties that are perfect for this strategy, some often face the dilemma of deciding which additional property to build on their existing real estate asset.
Scott recently purchased an 809 square metre block in, Queensland with the intent of subdividing—splitting the block through the centre and creating two narrow lots of 404 square metres each, building two new homes on them, and holding these assets as part of his property portfolio.
However, the property investor has yet to decide on the type of properties he would build on the block.
According to him: “We could build homes with [an] owner-occupied appeal that would rent out at a negative cash-flow result, or we could build homes with dual-key capabilities, [which can give] us a positive cash-flow result [even if it’s] … less likely to offer owner-occupier appeal.”
“The construction, of course, will be very similar as the dual-key homes won't have as high-quality finishes and fixtures, whereas the owner-occupier appealing homes will have a higher-end finish,” he added.
As a buyer’s agent, Cohen Handler’s Simon Handler believes that seeking out blocks that you can split down the middle in order to build two income-producing properties is, first and foremost, a great strategy.
In Scott’s case, he can build a home with an owner-occupied appeal and go down the path of ensuring capital growth, or he could build homes with dual-key capabilities and chase yield instead.
Building homes that appeal to owner-occupiers tend to entail more expenses for fixtures and fittings since these type of properties tend to be more luxurious so that it could attract a certain type of tenant who will, hopefully, stay in the dwelling for the long-term. On the other hand, homes with dual-key capabilities are often simply described as “cheap and cheerful”.
Smart Property Investment’s Phil Tarrant explained: “These are getting a little bit more popular now—a house [that] might have an attached studio or one-bedroom apartment … So, two people [can live and rent] on the same asset.”
Should property investors build a house with a granny flat, two side-by-side properties, or two houses that both have a granny flat? Should you stick to two income streams or create four, if possible?
Simon believes that the decision to build on a subdivided block depends on several factors, including the investor’s financial situation as well as his goals, capabilities, and limitations.
The buyer’s agent said: “Scott might be young and he might want to sell the one property down the track to pay off the mortgage of the other or to move up and get a bigger property [so that he could] build his way up in the property ladder like that."
“[If that is the] … scenario… [he should be] building something that's going to be more easily [sellable], that's going to look better still in a few years.
“If Scott's older and it's just pure income for him, [I recommend to] do it as cheap and cheerful as possible and just get [a] great a yield in return and cash in his back pocket as possible,” he advised property investors.
It would also be best to look at the rate of supply and demand of the particular type of property that you are planning to build, as well as the demographics of the area. Ask: Are there more people who are looking to rent these properties or are there more who would like to secure these properties themselves?
According to Scott: “Do your research [on] what sells best and what rents best in the marketplace [that] you're in, and then do whatever the research says, I guess.”
“It's all about doing the due diligence in that area. [Find out about] the demographic—who lives there, who's going to rent there—because you might be better off building four apartments, [or] you might be better off building two houses.
“There might be different avenues that you [could] go down [into],” the buyer’s agent added.
As with all strategies in property investment, subdividing properties entails diligent research about several factors that may affect the assets and the investor’s portfolio as a whole. Aside from self-education, it would also help to get expert advice from real estate agents with local ground knowledge who can tell you all the possible outcomes of different decisions.
Scott said: “Meet three real estate agents from the area and [say], ‘If I had these three different scenarios, what would sell best and what would rent best?’ and get a feel for that … That'll get your best understanding.”
Subdividing properties is a strategy that is teeming with risks, but when done right could add significant value to an investor’s property portfolio and can ultimately lead to his success.
The buyer’s agent believes that as long as you do your research—buy the right property at the right price, understand the build costs and the local council regulations, and avoid overcapitalising—then the said strategy can do wonders for your wealth-creation journey.
“Do your homework before you buy … You really need to know what you're doing and [it would be better if you] have done it in that area before,” he concluded.
Tune in to Simon Cohen’s Q&A episode on the Smart Property Investment Show to know more about the most useful measures to evaluate the performance of your property portfolio.