Buying an investment property and leveraging it’s subdivision potential sounds pretty smart, right?
For most people, subdividing land seems like a straightforward concept.
However, the reality is far more complicated.
Subdividing property has its pros and cons.
The pro is that you can make a nice profit if done right.
“There is a skill to property subdivision and what I have seen over the 20 years as I’ve been helping people with tax, is that 80% of the people haven’t mastered the skill when they decide to get into subdividing investment properties.”
-Rick Nieuwenhoven, CEO, Nieuvision
Common Mistakes To Avoid When Subdividing An Investment Property
1. Lack Of Research
Most people make their decision based on emotions and preferences on how they have to subdivide their property.
For instance “I live in the suburbs, and it seems like a good suburb, so I am going to subdivide an investment property in this suburb”.
It is not a pragmatic approach and one of the biggest mistakes when subdividing an investment property.
Thorough research should be the starting point before investing.
2. Not Anticipating The Timeline
Sometimes, people buy an investment property at the high point of a cycle.
Then they need time (generally 2 to 5 years) to appraise the property’s value.
Instead, some math should be done beforehand, like how long you should hold before subdividing the land?
3. Failure To Determine The Right Margin
Now, imagine holding the property for five years and simultaneously incurring out of pocket costs.
It is not a wise decision.
So you should add the initial investment to the holding cost of the last five years on that property.
It would help if you substantiated the overall investment cost and set the best profit margin by allocating the right amount of money.
How To Pick An Ideal Investment Property For Subdivision
When determining the subdivision potential of the property, consider the following factors:
1. Zoning: Has the local council zoned the property for residential, business or commercial use? Accordingly, you can meet with a property surveyor and access the relevant information from the local council.
2. Land Layout: Ideally, the layout should have enough area to install a driveway – 2.5-3.5 meters.
3. Land Size: To meet the local authority regulations, the land size should be at least 700 sq meters of usable land. However, this varies from state to state.
4. Land Gradient: Relatively, land with a flat block is cheaper and easier to work for subdivision compared to sloping block.
Breakdown Of Some Costs You Should Consider
Undergoing a development project requires some essential financial resources to cover to the cost of administration and construction. When subdividing consider the following:
1. Subdivision: This includes council fees and the cost to prepare council documents such as development approval (DA).
2. Finance: When working with lenders, you will need to invest approximately 20% of your savings to secure your project development credit. At the same time, you need to factor in the interest cost payable over the loan term.
3. Construction: This expense largely depends on the nature and size of the property. However, if you need to demolish the existing structure, you will want to add this to your budget.
4. Contribution: At the same time, the contribution fee is another added cost that includes road and sewage works. For accurate estimates, check with your local authorities.
More Than Meets The Eye
In this blog post we have provided you with an overview of the process including common mistakes, how to pick an ideal property for subdivision and the costs that you should consider, however, as always, there’s more than meets the eye.
With more than 15 years of experience in finance and property, we’d love to help you with your next property investment project.
Be that fresh ideas, leveraging our industry connections or acting as a finance sounding board.
We’re always open for a chat about how we can help you grow your wealth, contact us today and let us help you get started with your Property Investor Blueprint for Success!
