By Rich Harvey, CEO & Founder, propertybuyer.com.au
There are many mum-and-dad residential investors considering more sophisticated deals in today’s market. It could be the result of tougher tenancy legislation, rising buy-in prices, increased taxation, higher rates charges or a combination of these and other elements. Whatever the reason, I’m finding more and more people are looking for an advantageous “twist” from their investing to create additional equity and income.
As such, we have seen an uptick in enquiries for splitter-block opportunities. These are entry-level projects that can enhance your balance sheet. Many can also be attempted with relatively little experience.
However, they are riskier than simply buying a set-and-forget home. There are several factors that need to be taken into consideration if you’re looking at a small subdividable site.
Here are five elements that must be factored in to mitigate your risks and boost the rewards.
Town planning
Those wanting to tackle a small project without professional town planning guidance are making a serious mistake. A town planner who intimately understands local council requirements is worth their weight in gold.
Town planners will firstly advise on whether the development would gain approval. The starting point is the zoning, but other elements – from site frontage and dimensions to the types of surrounding properties – can materially impact development potential.
Then there could be town planning overlays, such as those about flooding or protected vegetation, that could put your plans on ice.
The other advantage delivered by town planners is the ability to spot extra potential. They will be aware of loopholes that may yield an extra block or higher density from your site.
Service connections
Knowing how services can be accessed and connected to the land you develop is essential before you go to contract.
Sometimes, depending on the location, a small developer will need to pay for services to be run to their block from a distance. This can be a huge additional cost that can destroy a development profit.
There might be easier ways to connect to services, perhaps via agreement with neighbours or some other path. However, unless proper searches are conducted during your due diligence, you can be at risk.
Drainage
I’ve seen plenty of aspiring small developers come unstuck on this one.
Facilitating the drainage of water off your site in a manner that doesn’t impact any neighbours will be a key aspect of any council approval. You can’t simply allow water to flow onto adjacent properties.
As such, land that slopes away from its road frontage can be a bit of a nightmare to subdivide. I know of one associate who commissioned a hydrologist’s report before they could proceed with their project. In that case, the slope was so heavy that the new block would have required water to be captured and then pumped back uphill to the council drain. It was going to add tens of thousands to his costs, so he put the plan on hold.
Demolition
Demolition – either partial or total – is strictly controlled in many council areas. Before you buy, it’s essential you understand what you can and cannot do in regard to remodelling, demolishing or shifting existing structures.
Pre-war housing can seriously upset your development plans, particularly if the home traverses the proposed subdivision line.
You must be scrupulous in your due diligence on this.
Feasibility
The number one way to check whether to proceed with a small development site purchase is to run a full and frank feasibility of the project.
Try to be as accurate as possible. If you can’t be certain of a cost, then be conservative and add in a contingency percentage as well.
Look at a full list of costings – everything from home demolition and interest on your loan through to professional fees and council charges. You must create a comprehensive list of outgoings.
In addition, you need to be realistic about the eventual end value of the block. And don’t forget to allow for a reasonable profit for all your hard work and risk.
In all cases, relying on professional guidance when conducting your feasibility calculations will stand you in good stead.
Small developments can be an excellent path to property success, but they are also fraught with downside. As such, seeking advice from a reputable professional, such as a buyers’ advocate, is crucial. They are well positioned to ensure you yield the best possible outcome with the least possible risk from your small project.
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