When carried out with due diligence, subdividing properties could be a perfect strategy for “creating instant equity”. How can property investors maximise benefits and mitigate risks?
Subdividing properties is defined simply as dividing one property into two more for added value.
While often considered risky as an investment strategy, a good execution may lead to significant equity gains within the short span of 12 months.
According to property investment adviser Erin Warbrook, before ultimately jumping into the property market and implementing this strategy, property investors are strongly advised to educate themselves and engage the right professionals.
Before buying a development block, they must be aware of the area’s zoning, which can ultimately affect the changes they can make to the property in the future. Zoning information is often available at the local government website.
Zoning information, also referred to as the density codes, can help investors determine the “minimum and average site area per dwelling, the maximum plot ratio [or the] percentage of house coverage for each block, minimum and average setbacks, and the size of your courtyard area.”
Once the zoning has been established, the investor may start working with a trusted builder to lay out a development plan that adheres to the rules laid out, then obtain an approval as soon as possible.
The planning approval will serve as the “green light” to proceed to the building process. “The approval process can takes months longer if it is incorrectly submitted,” Ms Warbrook said.
Among the factors that may affect how investors subdivide their property are:
According to Ms Warbrook, the shape and slope of the block will be one of the factors that will determine the number of dwellings that can be built on the property.
“The shape of the block can restrict access or reduce the usable working area of the land making construction impractical [and the] slope of the land has the same effect,” she explained.
“Unfortunately, many first-time investors are caught out by not having this experience. When blocks are being marketed by real estate agents, they also make no allowance for these attributes that have large financial impacts on your outcomes.”
Before purchasing a property for subdivision, it is advisable to conduct a survey that will confirm the number of dwellings that can be accommodated on the property.
An experienced builder can easily tell investors whether or not their target number of dwellings is achievable on the property that they want to purchase.
“The cost of the survey will … [depend on] the size of the block … This should be considered as an investment in your project and not a cost as it could potentially save you thousands of dollars in lost revenue,” Ms Warbrook said.
Investors must also consider other costs brought about by major services like sewer, water, and power, which can easily alter their budget.
“Sewer and water require a certain gradient in order to ensure that the service will actually work when the houses have been built. The invert levels are also found on the same survey we would order to ensure the slope and shape will not have an adverse effect on the project,” Ms Warbrook highlighted
“If the topography of the block does not lean towards the correct gradient for these services to work, it may cost multiples of thousands to make good the levels to ensure a successful development.
“In [Western Australia], the Water Corporation and Synergy charge the developer a fee to connect additional dwellings on one site to the existing services... Synergy also charge a similar fee for additional dwellings connecting the power, and you get an estimate for these costs by calling the appropriate authority.”
At the end of the day, as in any investment strategy, success in subdividing will depend largely on the investor’s knowledge and dedication as well as his relationship with his team – from good surveyors to experienced builders.