Ensuring a profitable renovation: Part 3

Purchasing land, subdividing and building on it obviously involves a significant commitment of time, e¬ffort and money – so investors need to look into the risks and rewards before proceeding.

At its most basic level, subdividing involves buying a property with an extra-large block of land and dividing that land to either build another house or create a new block of land you can sell.

While the cost and effort involved in such a project can be higher than other strategies, it can be well worth it due to its high profit potential, according to Positive Real Estate CEO Sam Saggers.

“Subdivision is a proven strategy that will allow you to add value to your real estate,” he says. “It’s all about forced equity instead of waiting for it.”

To succeed, investors need to carefully assess their strategy and plan well in advance. With this in mind, investors should consider purchasing subdivisions in the second phase of their property investing career, Mr Saggers suggests.

“The first phase is usually owning a few buy-and-hold properties and just getting used to property and all its good traits and negative traits,” Mr Saggers says. “If the investor can handle pressure, then subdivision could be a good next strategy.”

Weighing up the costs of the project against its potential profit is important in assessing whether your plans are viable. Factors that can a¬ffect your profitability include the suitability of the block for subdividing, council restrictions, and building costs.

By assessing these before undertaking your project, you will be able to more accurately assess the costs of your development and give yourself the best chance of coming out on top.

Checklist: is a small development project suitable for you?

• What is my current risk profile?
• Is my earnings potential at work in any risk of decline?
• How many property cycles can I keep investing for?
• Do funders see me as high risk because of my age?
• Do I need to risk more capital to reap higher profits?

Subdivision is a proven strategy that will allow you to add value to your real estate

Block suitability

One you’ve established that a subdivision is right for you, it’s time to find a suitable location.

To ensure a profitable renovation, you should pay particular attention to local council requirements – any unanticipated delays or problems can increase holdings costs and eat into your budget.

By carefully assessing a block to ensure it meets the needs of your project, you can avoid unwanted surprises later down the track.

Tradebusters managing director Laorence Nohra says it is an absolute must to familiarise yourself with local council guidelines as well as zoning regulations for the property location.

“If it does have subdivision potential, you need to understand what the minimum lot sizes are and assess if any development will be feasible based on these,” she says.

Ms Nohra recommends ge¬tting professional advice from an experienced local architect or planner in this space to ensure you have correct information.

Investors should remember that approval time will depend on the local council, with some approvals taking a few months and some taking much longer.

Assessing this before purchasing the land is important to ensure you’re not unexpectedly waiting to see a profit.

The other factor to consider here is the block type and size. You need to find out the minimum size for subdivisions required by the managing council, says Mr Saggers.

“If the council requires 400 square metre divisions, then look for 1,000 square metres to subdivide. You may need the extra space for roads and infrastructure, such as water, power, phone and gas,” he says.

“Corner blocks are ideal for subdivisions, as two street frontages make the subdivision easier, and also prove to be more valuable.”

Checklist: local council requirements that can affect your plans

• Height limits of the development
• Water, sewerage, drainage and electricity
• Beautification of unused land (landscaping)
• Minimum block size
• Plot ratio
• Building density ratio
• Fire ratings of the development
• Covenants, caveats and encumbrances

By carefully assessing a block to ensure it meets the needs of your project, you can avoid unwanted surprises later down the track.

Project suitability

While some investors will simply sell the subdivided land, numerous experts believe that building on the land is a more effective strategy.

Mr Saggers says that unless it’s in a very popular area, land is often hard to sell by itself – particularly unusual block shapes such as the ‘battle axe’ block (subdivisions with a driveway down one side to access the large block of land at the back).

You can attract buyers by adding a house to the newly subdivided land, Mr Saggers says. For this strategy, you need to look at benchmark sales of new properties in a similar area.

The most important factor when it comes to the profitability of your project, however, is to not overcapitalise. You can do this by thoroughly assessing your building costs. “You don’t want to blow your margin on extra build costs,” Mr Saggers says.

To ensure you’ve got everything covered in this area, you should start by looking at zoning, says Subdivision and Construction Management principal Jacon Parry.

The land’s zoning will tell you what you can and cannot develop on the site, he says. This information will extend to such things as density, plot ratio, building height, minimum frontage and lot size and car parking requirements.

“Other physical attributes include infrastructure that services the site with essential utilities such as sewers and water. Issues surrounding these can substantially affect the site’s viability when it comes to redevelopment, and it’s best to talk with a professional about these before finally committing to purchase any property for subdivision,” Mr Parry says.

By assessing the physical attributes listed below, you can determine how easy or difficult it will be to build on a certain block. This can help you eliminate, or work around, any costly surprises.

Checklist: before building

• Land topography: slope, gradient or flat
• Aspects
• Market preference, three or four bedrooms
• Services in the area, underground power, sewer, water
• Fencing
• Backyard

The most important factor when it comes to the profitability of your project, however, is to not overcapitalise.

Financial suitability

Budgeting is one of the most important preparations you can undertake to ensure a successful and profitable renovation.

Property Prosperity founder Darren Standish warns that running out of money halfway through a subdivision project will get you into a lot of trouble, so it’s vital to ensure you have sufficient funds to see the development through.

When budgeting, it’s important to note that it is common for the builder’s quotation to leave off certain items. In many cases, quotations are for the “shell” of the house, with additions made later.

“Some items that are often not included in quotations are additional footings, storm water, rainwater tanks, driveways and perimeter paths and landscaping,” says Mr Standish.

This can be avoided by having detailed plans. “It is advisable that you a¬ttempt to fix the price of the contract with the builder prior to signing the contract.

This will ensure that you do not get any significant cost blowouts during the course of the build,” he says.

Mr Saggers says investors should be looking for a profit margin of 20 per cent from straight subdivisions.

“To assess if it’s viable, all costs and resale costs should be considered,” he says.

Case study: a subdivision gone wrong

Subdivision and Construction Management shares the story of one client who didn’t correctly assess his development before purchasing.

The client signed a contract to buy a property which, at face value, appeared to be capable of subdivision into five lots.

The property was an existing house with a very large backyard – 2,700 square metres – and had been promoted as having “subdivision potential”. The zoning of this particular property did in fact allow for subdivision into lots as small as 400 square metres, and after doing some quick research, the investor signed a contract to purchase it.

“On the face of it, it seemed like a good buy,” says Subdivision and Construction Management’s Jacon Parry.

However, when the client contacted Subdivision and Contract Management, the property had several issues that severely affected development feasibility.

“In fact, the then current owner of the property had already approached us with a view to developing the property himself, and only decided to sell it after realising the additional costs and difficulties involved,” Mr Parry explains.

At that stage, the investor was on contract to buy the property but it had not yet settled, so while he was able to halt proceedings of the sale, he forfeited his deposit. Had the property been correctly assessed, this loss could have been avoided.

The issues with the property were as follows:

The developable land was at the rear of the house and access to it from the road was next to the house. There was insufficient width without either modifying or demolishing the house, which the buyer had not bargained on. Access ways can vary in width, depending on the number of lots being served.

Topography – the land sloped downhill, away from the house. The existing house sat on a ridge. The only sewer that serviced the property sat just behind the existing house. The bulk of the land was lower down and could thus not be serviced by that sewer. Sewer access would have had to come from lower-lying neighbouring properties. This is not an automatic right and is something that can be, and often is, denied. If it is approved, it often involves paying compensation.

There was a gully partway down the lot to control and divert overland flow of storm water. Overland flow is often a big problem and is sometimes protected with easements. They cannot be built over without remedies being put in place. In this case, a small bridge would be required with one or two large concrete pipes placed underneath to gain access to the land on the other side.

The lot had quite a lot of trees in place and their removal would have required a separate application. Mr Parry says even if all these issues could be remedied, the costs involved would have been too high. “These issues to a trained eye are fairly obvious,” he says, “but to someone without experience they are not always apparent.”