Two V Three: How many dwellings to put on your land development site? Jo Chivers

What’s the big difference between a two or a three unit site? Apart from the obvious number of units, there can be a big difference in the equity you can create.

Most people want to manufacture as much equity as possible from their development and it often comes down to how many dwellings can be built on the land.

There are times when we look at land and think, would this make a better dual occupancy site than a three unit site? Just because a site is large enough to fit three units, doesn’t mean it’s always the right way to go.

Should we build two larger four bedroom homes or three x three bedroom villas?  The answer is not always obvious and we need to look at several factors:

-          Budget, the three unit project will cost more to build. Can our client fund it?

-          Strategy, is our client planning to hold and rent or sell?

-          Demand, what is in demand in the area; four bed or three bed homes? We revert back to our client’s strategy then research the demand in the rental or sales market.

-          Growth prospects; the four bedroom homes may have better capital growth prospects as there is a higher land component for each dwelling, again, check back to our clients strategy.

-          Location. What is there mostly in the area?  In a new housing estate there may be mostly four bed houses. Does that mean we need to build four bedders?  No as we may want to differentiate ourselves and supply something different.

A typical Property Bloom three unit project can generally create about 40% more equity than a dual occupancy. This is appealing to clients who want to build their portfolios quickly and use the equity to keep developing.

A three unit project may suit those on higher incomes as they could finance the higher costs but will also benefit from strong depreciation. There is also flexibility to hold say two dwellings and sell one after a few years as the depreciation benefits dwindle. The gross yield is generally around 7%.

It’s important to have a good discussion with your accountant about your strategy and the impact the different sizes of developments can make on your finances.