When should you subdivide? DPN's Sam Khalil

GUEST OBSERVER

Subdivisions are the alluring sirens of the investment world.

There's a blunt logic to the concept that seems unshakable. Which is... If you've got a massive plot of land, dividing it up into two plots will instantly make you money, won't it?

Whether you’re a home owner looking to make extra capital from your oversized property or an investor subdivision certainly seems attractive. 

Especially, if you do it smartly and thoughtfully. With careful research, you can enjoy great capital growth with a booming yearly rental income. It's a wonderful, tantalising prospect.

Is this the best use of your time and resources? What is your skill set?

Yet, like most investment options, if not done carefully, it can also go horribly wrong. 

Here are some of the things you'll need to consider: 

Council regulations and permissions: All councils have very definite rules on subdivisions, so you need to find out your local environment plan and zoning rules. Many councils will have a minimum land size the property needs to be before they'll allow the development. You may also find that you’re limited as to what you can actually build. They will usually have a rule about car access and parking for both dwellings. There may be a certain amount of land that has to be left as open space (to prevent two houses sitting on top of each other).

There may be restrictions on the height of the dwellings or how close they are to the boundary. And expect that there will be rules about the impact of your proposed subdivision to the neighbours. All this means you need to do meticulous research. It's certainly a good idea to use a solicitor or legal expert to drill down through the fine print.

Building costs: Make sure you get a number of quotes from builders and architects, with the caveat that these costs can often balloon out. Ideally find a builder and architect through referral on a similar project so you know what to expect in terms of time and money. Architects can be expensive if you’re not designing it yourself. Another option is to use a draftsman, who’ll be cheaper, but maybe not ideal if the development is very complex.

The more organized and prepared you are about what you want, the less likely it is that the timeline and budget will go out of control. And think about who will project manage the subdivision? It’s expensive to hire someone but very time consuming to take it on yourself.

Consider the aesthetics: It's not enough to merely subdivide. You have to consider what the final dwellings will look like. If they're not appealing to a majority of renters then you've wasted your time. Common mistakes include: blocks with bad subdivisions where two houses are sitting on top each other. Or houses where there's little privacy and the occupants can see into the other's windows.

Or simply, unattractive houses that are cheap to manufacture but hardly anyone would want to live in. A badly designed subdivision will have the result of devaluing your entire property. This is where experienced designers and professionals come in. DPN's acclaimed CASA Allegra project home is a good example of well-designed home suitable for subdivision, that are economical yet aesthetically pleasing. 

Is subdivision economically practical?: In other words, consider whether the area is growing enough to sustain dual rental incomes off the one property. If you’re in a solid growth district which has good infrastructure, a strong local economy and an influx of people coming from outside the area, then there’s a clear path ahead. You also need to know what are the future plans for the area. For instance, if the area is about to be heavily developed with lots of apartment blocks and townhouses this will soak up a lot of the rental demand.

It could even lead to oversupply. Suddenly you’ll be competing with many other rental properties. This could then impact on your rental yields, even driving them downwards. So both present and future research into the plans for the area are critical. Remember, you don’t want your properties sitting vacant for long periods so there needs to be a strong pool of renters and high demand. Also do your sums and ensure that the rental yield from the subdivided property works out for your budget.

Finally, budget out the cost of subdivision in complete detail. It may not always be economically advantageous to subdivide if, for instance, the property isn’t all that big; there are lots of complications with the council or the land and the cost is on the high end. 

Hidden costs that you may not have thought of have will impact heavily on your budget: These can be things like contribution fees from local councils. Councils impose these on developers towards the cost of providing local services or facilities because of the effects of the planned developments. For example, if more water or sewerage is needed, because there’s an increase in the number of lots/ houses.

Or it can be deemed necessary if your new developments create extra water run-off, which in turn impacts the environment or flooding. In which case you, as the owner, may be up for having to pay for additional reports and research.

This council contribution fee is commonly known as a section 94 or a section 94A. This fee can be quite hefty depending on the council and the amount of extra infrastructure needed. Alternately there may be extra environmental issues that arise from your subdivision (for example, if they threaten an animal or plant species or impact the soil). And never rule out the possibility of a neighbor strongly objecting to the subdivision and issuing a legal challenge. 

Ask yourself – is this the best use of your time and resources? What is your skill set? Is this too arduous to take on yourself – remember that you’re managing a formidable and costly project. 

In which case, consider chatting to DPN about much less stressful and positively geared property investment options. We’ll arrange everything for you! 

Instead of subdividing, you may opt for a granny flat if your goal is simply to add rental yield to your existing property If this is the first time you’re dipping your toes into the water of subdivision and looks very complicated, you may be better off simply selling the property to a developer. 

If you’re determined to go ahead with subdivision, then ensure that you can afford it and you’re not sinking funds into a black hole. Also, make sure that what you’re putting on the property is really value for money. In other words: ask questions and make sure all your choices are backed up with research and what you can afford.

SAM KHALIL is founder and director of Direct Property Network.