How to find properties to subdivide for a profit

For investors, subdividing a property may be a way to potentially increase the return on investment. However, it can also be risky if you don’t do your research and consider your strategy carefully.

A subdivision is when you divide a building or piece of land into two or more properties. But before being able to pursue this approach, investors will have to go through several logistical hurdles. For example, you’ll usually need to get local council approval prior to development and each local council will have its own regulations in place.

You’ll also typically need a deposit of at least 20% to get finance for a development project, plus funds to cover the cost of stamp duty and other buying costs.

To help you determine whether subdivision could be worthwhile for you, Canstar spoke to experienced buyer’s agent Giles Hill. Mr Hill specialises in helping clients buy properties in ‘growth areas’ with the aim of creating equity through renovation, subdivision and development. We asked him for his tips on how to find properties to subdivide for a profit.

What are the main types of subdivision?

Residential subdivisions typically involve the splitting of a parcel of land, referred to as a lot, into one or more parts or lots. Subdivisions can be either torrens, strata or community titled. This refers to who owns the freehold of the land and how it is managed.

Torrens title may be preferred when there are no shared or common areas. With torrens title, the freehold of the land belongs to the owner of the property and they are responsible for its upkeep.

Strata and community title may be favoured when there are common areas. For example, units and townhouses where some areas are shared such as access driveways, hallways, parking and gardens. Strata tile is designed to enable the efficient management and maintenance of these areas.

Examples of subdivisions can include a project where an existing home may be retained, and an additional dwelling constructed beside or behind it. Alternatively, an existing house may be demolished to make way for units, a duplex or town houses. The decision of what might be most profitable will generally be determined by factors such as what the local authority will allow and what will be most in demand by local buyers and renters.

What types of property may be suited to subdivision and which may not?

There are several options for subdivisions. The most popular strategy is to buy a single dwelling on a larger than average size block for its local area. Each suburb has minimum lot sizes stipulated by the local authority and if an existing lot is large enough to accommodate more than one, then subdivision may be an option. It’s also important to consider local authority zoning because different zones allow for different types of development.

As well as a larger block, corner blocks may be desirable as they can negate the need for a driveway to access a property located behind the street-front property, allowing more land for development. This also provides more street frontage. Street frontage homes can carry a price premium and can result in a more valuable property.

Level blocks without trees can simplify construction costs, as can considerations for stormwater management. Properties on the higher side of the street typically are cheaper to drain than those on the lower side. This is because lower side properties may be required to build stormwater retention tanks, which can be a significant additional cost.

Identifying impediments to subdivision such as easements, powerlines, bus stops, pedestrian crossings, overshadowing neighbours and restrictive covenants (restrictions on how you can use the property) is also paramount in property selection.

What are your tips for finding a property to subdivide?

The best tip for finding subdivision opportunities is to become an area expert or work with one. Each suburb has different lot size guidelines and each authority has a different policy for development. It is a specialist area of property investment so professional help is likely to be money well spent.

To become an area expert, you will need to immerse yourself in the local area. You need to understand both the local authority’s development policies and also the local demographics.

You will also need input from town planners, architects, engineers and a property lawyer. Building a great support team around you is essential to help ensure you achieve the best possible results.

It is also prudent to look for subdivision properties that are in growth areas. Local authorities in these areas may be more sympathetic to increased dwelling density as they need more homes. The property may also benefit from stronger capital growth and the subdivided site and new dwellings may also perform well. To maximise your return, you want to benefit from both suburb growth and your subdivision.

What are some common costs associated with subdivision?

The cost varies significantly. For a simple subdivision you will be paying for town planning, surveying, council and legal fees. This cost varies depending upon the complexity and location. However, the cost may be relatively low compared with the potential return.

More complex subdivisions can cost much more, and a thorough feasibility study should be completed prior to purchase. If the capital gain is sufficient it may be worth moving a power pole or sewer pipe. It all comes down to the numbers.

Expect to pay fees to a town planner and architect to assist in designing your development and securing a planning approval. You will pay for working drawings and engineering drawings to be granted a building/construction permit. Fees and levies are also payable to the local authority.

Next up will be the cost of demolition and then construction. Finally, you will secure occupation certificates and subdivision titles.

How long does the process of subdividing land take?

Again, this varies significantly based upon the complexity and local authority. Six to nine months is about the quickest. The construction stage for duplex or townhouses will take a further 9 to 12 months.

What are some pros and cons of subdivision?

Pros

• Subdividing and building can be lucrative. The value of the land once subdivided and developed could be significantly more. If the project cost has been accurately managed, then a profit is possible.
• The completed project, if sold, may generate a profit or if held and rented could provide a stronger rental yield than the original property. This, when coupled with the tax depreciation allowance claimable of the new build costs, can make this an attractive cash flow positive property to hold.  Subdivision can provide you with options. You can sell the homes or hold them. Or a bit of both, sell one, hold one, etc. Whatever suits your specific needs.

Cons

• It takes time and there are plenty of potential pitfalls for unprepared investors.
• It’s expensive and project costs are not fixed. Therefore, a contingency buffer should be in place so you are covered should things go off track.
• You may be without any rental income for the construction period of your project so this can add a significant cost to the project.
• Market changes can impact your potential profit.
• Properties that are built may not align with buyer’s wants and needs.

Subdivision projects can be very lucrative but the risks of getting it wrong are generally much greater than with a typical property purchase. The processes of site due diligence and project feasibility are complex, and great care and/or professional guidance should be sought to avoid costly mistakes.