My very first home. Unit vs subdivision strategy

Hi Jenna

Welcome aboard.

A lot of it comes down to how active/passive you're willing to be.

A subdivision and build out the back will take time, effort and money. If your boyfriend's handy than that's a good start.

The unit doesn't sound too bad either – but there's limited scope to add value.

Personally, I prefer a house with a yard – whether it be for investment or a PPOR but if the numbers stack up, a unit can be fine too. I have both types in my personal portfolio.

Cheers

Jamie

My first purchase was at the age of 18 and it was a unit due to the lower entry point. I have made excellent money from it but in hindsight I kick myself for not buying land and developing the hell out of it. Of course I couldn't buy a house due to many restrictions but if I could I would buy a house.

The potential on land (not just any land) outweighs the yield you get from units.

At the end of the day do the cashflow numbers and marry that against the potential of CG. 

If the property is within 12km of the city then that's gold. Get yourself familiar with zonings and what you could do with the property.

Regards

Shahin

Hi

Many people make great short term gains subdividing, gives a good kick start to your equity.

regards

D

Another vote for the subdivision route. It is the ideal place to start with small developments. Often the numbers will stack up better to leave an existing house, even if it becomes a lower density development, rather than knocking a house down and building 3.

Just run the numbers and see which works best and that you can get finance for. The simple subdivision should cost alot less to do and be much easier to finance. Definitely chat with the council, to confirm if they require you to build to the higher density. I have experienced this before, where I enquired to the council if they would allow subdivision and they advised that they would prefer units.

Also for a simple subdivision, a corner block will work best, especially if you can get separate entries off different streets.

Cheers,

Matt

Hi Jenna,

Another vote for the subdivision option.

Western Suburbs option does not, generally speaking, have suitable rent returns.

Concur 2 X 2 units are better option than 2 X 1.

Seek a corner block or block which you can battle axe, thus leaving the original house there for as long as you can.

Talk extensively to the relevant planning department to find out what they require and what restrictions are in place.

Make sure you do your numbers subdivisions/developments can blow out, especially during your baby steps stage. Some companies do offer a project management option which may be a good place to start for you both. While this will cost more – it may also save a bit, especially if you choose wisely.

Finance is the key issue – generally speaking banks see developments as riskier propositions and your inexperience may count against you. Having said that if you really want to move forward you can get there.

Hope this helps.

Hi Jenna,

It is great you have come to be online forums to ask about where you should go from here. Despite the overwhelming support for subdivision, it is not the instant rags to riches that most people suggested  it to be. I will try to debunk a few myths and hopefully share with you a clearer direction.

Well selected inner city villas and townhouses still have strong capital growth and in some instances I have seen this growth to be superior than development sites. However, when selecting these high performing  properties you still have to apply some sound fundamentals. these fundamentals include:

• Purchasing a villa with a higher land component value. despite the land size been generally smaller than  a subdividedable block  you could still purchase villas where the land value is 70% or more. Historically,  properties with high land component value tend  to outperform the market as land price growth is greater than property value growth.
• Seek areas which are going through a demographic enhancement. The areas which are already nice probably will market perform in terms of their upside. I like to purchase in suburbs where there is plenty of future demand which will drive growth. This future demand is often attributed to improvements of infrastructure and gentrification of the area.
• Look for suburbs where the supply is limited.  in most inner-city suburbs there will be no further greenfields,  however look  to the suburb  zoning and see if there is going to be a steady stream of future villas and townhouses coming onto the market. This continued supply will hamper capital growth.
• You can still add value to villas through renovations and refurbishment or strategic acquisition. This  is when you purchase in a complex where the land size justifies a development significantly larger then what is on the complex.

Sub division generally has higher capital growth because the land value that you are purchasing is normally high. For novice investors,  they attribute the land price growth as there development margin but in actual fact this may have just been organic market growth. When selecting development sites I would urge you to consider the following:

• Many development sites at the low end of purchase price are actually unfeasible to develop in its current form. Taking Morley as an example if I was to purchase a subdividedable block around the $530,000 mark this is what my figures would look like (these are very general, but give you an idea):

Purchase price:  $530,000

Buying costs: $22,000

Finance net rent: $15,000

Renovation costs: $30,000

Subdivision costs: $25,000

GST: $10,000

Selling costs: $15,000

Reno house value: $400,000

Block Value: $230,000

Net equity created from sale: $13,000

Basically after all the costs, risk and headaches for 9 months you would be making $13k and then paying a portion of that in tax. There are two things which will make these numbers look better,  firstly you'll have to pay duties and holding costs regardless and secondly you might get some market growth which will boost these and sale values.

In saying all this, well selected development site are great investments (probably marginally better than inner-city villas and townhouses)  but the development is not what makes developer sites great. It is the land banking which will pay off in the long run! You can still get great capital growth from villas just make sure you apply the same fundamentals –  high land component value and value add through renovations.

Correct me if I'm wrong I understand the margin your calculating  being 630k-530k – 100 k 1/11th being 10k.

but there's going to be gst credits for alot of the work to get that piece of land up for sale.. So a lot of that 10k payable being able to be claimed back after bas statements sent in