Subdivision and development as an investing strategy
Subdivision and develop seems like the easiest way to create more equity in a property right? It’s true, you can create a lot of equity, but it’s by no means easy. Just like anything there are of course pros and cons…
A few things might attract you to the idea of subdivision and development as part of your investment strategy. You have the ability to make extra money and instantly generate your own equity. There can also be higher profits when you increase your rental income. That higher rental return is a big bonus, that’s for sure.
There are some large risks here that you won’t get if you’re investing in an established property. So here’s what we want you to know…
Firstly, you need access to more funds. If you’re planning to undertake a subdivision or development you need access to a cash buffer. There is no set amount, but we recommend about 15%, dependent on your risk. You need to be in a position where there are funds left over just in case something goes wrong… and things really can go wrong.
Next, there are holding costs you need to consider. You’ll be expected to start paying off that loan regardless of whether you have a rental income or not. If your cash flow’s tight then you may not have that time in your budget. If you’re planning to sell or rent you’ll also need to consider when you’re planning to release the properties onto the market. Mitigating those risks is really important.
Because there is more financing involved you may be in the territory of a commercial investment loan. This means different interest rates and fees associated with the loan.
Building the right team
No matter what you do it’s important to have the right people around you. Your team is going to help you make sure your investments are a success.
So here’s our list of experts you need to find:
Rise High Mortgage Broker – Having the right mortgage broker from the start is the best way to get what you need from the very beginning. Getting the right finance for your subdivision or development project is crucial to it’s success. Contact Rise High here to get yourself on the path to investment success.
Accountant – We’re guessing that your goal is to make money down the track… with this type of project you need to make sure your ownership structure is right from day one. It can be pricey to make changes to your ownership structure later and that’s not to mention the tax deductions you could miss out on. Factoring tax in is critical and your accountant will make sure you’re on the best path.
Project Manager – Finding the right builder or project manager will mean finding someone who has experience doing the type of project you’re looking to complete. They can be someone on your side who knows what they’re doing. You want to know they’re going to build to budget within a specific timeframe on a fixed price contract. This can mean penalties for the builder if they exceed that time frame.
Property Manager – If you’re planning to hold the properties once they’re complete then you need to get your property manager on board early. This can be as early as the planning stages. Show them what you’re planning to do and get an idea of what tenants might want in that area to make sure you tick all the boxes.
Real Estate Agent – If you’re planning to sell your property as soon as it’s complete, the same thing applies from a real estate agent as a property manager. They can give you market updates, let you know what your plans might be missing in that area, etc.
Architect – This one’s discretionary. Sometimes your builder will already have an architect, but sometimes you may have to source your own. Some architects actually specialise in maximising the use of a block of land. This could help you get the most from your subdivision.
Surveyor – They will help you mark out the subdivision and get the subdivision approval from the Council.
Conveyancer – Your conveyancer will help you with all the legal aspects of a subdivision or development project.
This can seem like an overwhelming list. But your Rise High mortgage broker can actually put you in contact with all the experts you need. So as long as you’re found us, we can help you with the rest.
Steps to Success
We’ve had a lot of recommendations so far. Finally, we have 10 of our recommended steps to ensure your project is a success.
Step 1 – Understand your borrowing capacity
It’s super important to understand what you can and can’t afford. It’s a really critical stage in your development. Sitting down with your mortgage broker to talk about your plans and what you’d like to do can set you in the right direction straight away. They can run some hypothetical scenarios and make sure you can afford the plans you want.
Step 2 – Finding the property
Once you’ve sorted your finances, you’re ready for the fun part. The property search! You need to find a property that has potential for the type of project you want to do. Find a property that fits your finances and your investment strategy.
Step 3 – Speak to the Council
Once you’ve found a property that will work with your strategy, it’s good to get an idea of what you’re allowed to do. Wherever the property is located, ask to speak to the local Council’s planning department. You can find out about zoning and tell the Council what you’re plans are. They can let you know whether they would approve the plans or not. This can save you the pain of purchasing the property and finding out later the Council won’t approve your plans. If they know you’re a serious buying and you’re willing to work within Council regulations, it might help you get your plans approved easier as well.
Step 4 – Research rental and house values in that area
Speaking to your real estate agent and doing a quick search on real estate sites can give you a glimpse of your future. You can find out what other similar properties in the area go for. This will give you the best idea of what rental income you can get once your properties complete. This is really important to make sure your project is going to have a worth while return.
Step 5 – Get pre-approval
If you’re really prepared, you might’ve already done this. But if you haven’t, it’s time. Get that pre-approval. At this stage you’ve spoken to you accountant about ownership structure and you’re ready to buy. That pre-approval will help you secure the property.
Step 6 – Make an offer
You know what your borrowing capacity is, you know what you want to buy, you know your ownership structure, it’s time to make an offer! Preferably you’ll be making an offer subject to finance. Even though you have pre-approval, subject to finance will protect you in case a valuation comes in short. you may also want to request a long settlement. If you’re planning to subdivide then you can get approval from the Council first and speed up the process, saving you holding costs. If you are going to have holding cost you may be able to get a larger loan amount to cover those initial costs.
Step 7 – Get your plans drawn up
Like we mentioned before, having your plans already drawn up means you can move ahead quicker. your architect or builder can draw up the plans with all the necessary checks of the actual property. They can also check if it’s going to meet all the Council requirements for step 8.
Step 8 – Council approval
You’re going to need Council approval for all your subdivision and development project plans. This can take a while, which is why we suggest starting as soon as you can. If it’s a larger development you’re doing in stages you can actually get stage subdivision approval. This way you can manage your costs and risks a bit easier.
Step 9 – Complete the project
This one is as obvious as it seems. Now you have all your approvals you can start and finish the project you’ve done so much planning for!
Step 10 – Revaluation
You’ve worked so hard to get to this point. You’re subdivision and development project is finally complete. So it’s time for the revaluation and explore the refinancing options that are now available to you.
If you would like to discuss your property investment opportunities the team at Rise High would love to help!
Contact us here or leave your details below an we’ll get back to you!