What you should know about sub-dividing

Before sub-dividing a property, land owners should consider the costs, any council restrictions and - most importantly - how they fund the project.

Over the last 50 years the great Australian dream of owning a house with a big backyard has abated somewhat to the convenience of living close to the city. We’re now paying more money for less land – but faster commute times. According to the Urban Development Institute of Australia the average size of land for sale across every capital city dropped below 500 square metres for the first time in 2015 – and historical data tells us this number will keep getting smaller.

In an active property market, any home owner sitting on a large piece of land is presented with the tantalising thought of possibly sub-dividing. This is particularly the case where there is enough equity in the property to finance the subdivision and build a new dwelling. Obviously the hope is to make a profit at the end of the process to help pay down any remaining loan. However sub-dividing is no walk in the park. There are lots of things to consider before making the big step – here are a few tips to start with.

Make sure it will be profitable

When thinking about sub-dividing, it’s critical to establish the likelihood of being able to make a profit from the exercise. Talk to a few real estate agents about the value of the land as a whole, then as two separate lots. Know how much building any new dwellings will cost and also think about possible taxes if one or both of the properties are sold. Remember the property market could shift during the build, so it’s best to be conservative and factor any potential market downturn into the calculations as well. In short, get great advice.

Make sure the property is big enough

The size of the land affects how many subdivisions can be made and the size of the houses that can be built. The minimum land size per property, and maximum dwelling size that can be built, varies from council to council. As an example, in parts of inner city Melbourne, it’s a minimum 300 square metres and only 50 per cent of the land can be covered. Off-street parking or a private open space like a balcony or yard might be required and there will be restrictions on the minimum front, back and side setbacks from the boundary. Having a bigger lot simply gives more flexibility when it comes to the type and size of the dwelling. Owners of smaller lots will have to be more creative. One tip is to see what neighbours and other properties in the local area have done, which should give a good indication about what is achievable.

Build one or two dwellings?

Savvy sub-dividers will work out if it’s possible to keep the existing house and build in the back yard, or if they have to demolish and build two new houses. Keeping the existing house will stretch a budget further, however does result in having an older property at the end of the process that may not be worth as much as a new place. For those who want to build two dwellings on a smaller lot, often a duplex – double storey houses side by side – is a more efficient way of getting larger homes, both with street frontage, onto the lot. Although, remember some councils won’t allow certain types of buildings in their area, so again, it’s a good idea to check or look around the neighbourhood to see what has already been done.

Financing the loan

If there is an existing mortgage on the property, find out your lender’s requirements, but it’s best to seek pre-approval for new plans. Remember, you need to cover any planning permit, demolition, advice and build costs, and if you’re borrowing some or all of the money required, the loan needs to be manageable once the project is complete. If the existing house is being demolished, temporary accommodation and storage costs will come into play as well. Have an agreed date for the construction to be completed in the building contract and consider negotiating that compensation is paid for additional living expenses, or lost rental income, if the property isn’t completed on schedule.

Sell the property? Or rent it out?

Once complete, deciding what to do with the houses is the next big decision. Keep in mind things like capital gains tax and real estate fees if selling one or both properties. If renting one property out and living in the other makes more sense – do research about the possible rental yield. Houses in a popular area may draw high rental yields and effectively cover all the repayments on the remaining home loan.

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