Generating profit through subdivision can be a feasible investment strategy if you know the ins and outs of property development. Just be prepared to invest your time, energy and finances into the project before diving in head-first.
Subdivision presents property investors with an intriguing concept: buy land and sell it off in smaller parts to make a greater profit than you would if you sold the property as a whole. Although it sounds simple in theory, subdivision is a tricky business. Before you start looking for a property with subdivision potential, you need to consider a number of variables.
What makes a property ideal for subdivision?
When it comes to subdividing a property, the development project will largely depend on local council guidelines and zoning of the land, but here are some things to consider when determining whether or not a property has subdivision potential:
- Zoning. The zoning of the land refers to how the local council has zoned the property, such as whether it's intended for residential, commercial or business use. This will influence your ability to subdivide the property. Once you’ve found out which zone the property is in, you’ll need to access the relevant information from your local council about whether or not you need a development approval (DA). You can also speak to a qualified surveyor to find out whether you can subdivide the lot.
- Land size. As a rule of thumb, the land size should be at least 700 square metres of “usable land” to meet local authority regulations, but this will vary from state to state.
- Land layout. Ideally, the property should have a good layout with enough area to install a driveway that’s 2.5-3.5 metres.
- Land gradient. A relatively flat block of land is easier and cheaper to work with for a subdivision project compared to a sloping block that may require you to cut or fill the ground with retaining walls to level it out.
What are the costs?
From administration to finance and construction costs, undergoing a development project requires significant financial resources. Here’s a breakdown of some of the costs you should factor into your development budget:
- Subdivision: This covers fees related to preparing council documents such as your development approval (DA), council fees, and labour that may be required to install new water or power networks, for example.
- Construction: If you need to demolish an existing structure before starting your development, you’ll need to factor this into your budget. Construction expenses will largely depend on the size and nature of the project, but you can expect to pay around $250,000 for a three-bedroom property.
- Finance: Most lenders will require you to come up with a 20% deposit in order to gain finance for your development. You’ll also need to factor in the cost of interest that will be payable over the life of the loan.
- Contribution: Contribution fees cover infrastructure costs including sewage and road works. Typically, contribution fees cost around $25,000, so check with the local authority to get an estimate.
Similar to sourcing a location for a residential or investment property, you need to conduct some market research to understand the local market. You’ll need to ensure that the property is close to amenities and transport hubs and that the property type is in demand for the demographic of the area. The location will form the basis of your exit strategy because you need to think ahead and consider who will buy the property when you’re developing and how much supply of property is in the area. You should contact the local council to see whether there are any similar development projects that have been implemented, as this could be a good indicator of buyer sentiment and a proactive council.
Forecast cash flow
If you’re currently renting out the subdivision property, you’ll need to consider the rental income that you’ll forego during the development as well as the ongoing interest or account-keeping charges associated with maintaining any loans attached to the property. Councils that allow you to maintain an existing dwelling and rent it out while you build on the land may be more attractive, as this will help your short-term cash flow. An important step in validating whether a property has subdivision potential is to project the estimated cash flow for the project. As a rule of thumb, you can deduct your total expenses from your net revenue to estimate your margin. You may want to enlist the services of an accountant or financial planner to help you through this stage. A good starting point is to observe growth figures and rental yields for similar property types in the area.
How do I know if my subdivision meets local regulations?
After you’ve determined the profitability of the development, you should contact a local developer to see whether the subdivision falls within local authority regulations. They can arrange surveys, engineers drawings and help organise your DA submission for approval.
How long does a subdivision take?
The process of a subdivision can take 6-18 months depending on the council and the scope of planned work. For a fairly simple project where a lot is being split into two on a flat block of land with a cooperative council, you should allow 6-9 months. A more complex or larger project on a steep block of land that requires engineering and demolition may take around 10-18 months.
Will my application be rejected?
One of the most common reasons for not having an application approved is due to zoning or regulation changes in the area. This is why it’s important to be proactive with your council and ensure that you have the resources required to complete the project as soon as possible.