Subdividing

Crown Money, where we show you how to pay your home loan off in up to half the time of a normal bank loan. Welcome to the Crown Money Podcast. I'm Jessie Edge and I'm joined today by our general manager, Chelsea Burton. Thank you so much for coming.

How you going?

Yeah, good. That's good. I just want to start by getting you to tell us a little bit about yourself and your background.

Sure. So I have been with Crown now for seven years. I'm the general manager. I'm also an experienced finance broker. I'm really passionate about helping people with their debts and I love investing in property.

Yes. So that's. That's definitely the topic we want to talk about today. Investing in property, this is something you're very passionate about and you've got quite an extensive investment portfolio, which is fantastic. So one of the ones we wanted to talk about in particular was subdividing and building and how we can make money in that sense. So talk us through one of the most recent projects you've done with that. What are you. What's involved? How do you find the property? What are the stages and some tips and hints that we should keep an eye out for.

Definitely. So I'm currently doing a development in Wynnum in Queensland, which is just by the beach, but a little bit from the city. Basically, finding the correct location is the key. So you don't want to be building in an area where everybody else is building. You don't want to be building in an area where nobody wants to live.

That's a good point.

Trying to find a property that reasonable in the market. So I look for areas that are going through a gentrification process, which basically means that old people, old residents moving out, new residents with more money are moving in and property prices start to go up. And then I look for the suburb next to that.

Very cool.

That way you know that people who can no longer afford to live in that suburb are going to be moving into the suburbs that you've chosen. Exactly. Then you've got to look at the sort of requirements for town planning. So all councils have different requirements when it comes to subdivision and you want to make sure that the property that you're buying is going to fit within their requirements for subdivision. So some councils will have a minimum area, for example, of 400 square meters. So buying a 700 square meter property to subdivide doesn't go away.

That's right. And do they each vary quite a lot?

Absolutely. So they each have different requirements and they have different amounts of apartments you can put on there or houses you can put on there. And they are really very varied. So it's important to have a chat with town planners in the area and make sure that you understand what you're looking for.

Is this even things like taking down trees and things like that?

Absolutely, absolutely. And for example, In Wynnum, it's two separate houses. So you subdivide one block and build two separate houses, not even units. So you know, it's two houses each on a 400 square meter block.

Yeah.

Whereas one of the other developments that I've done was the minimum was 280 square met. So it can be very, very different. I then talk to agents in the area and find out what people want to buy or what people want to live in. So, you know, are they looking for 3 bedroom houses? Are they looking for double stories? What is it that people want?

What's the desirable product?

Exactly right. And then you've got to work out whether or not it's achievable. So work out how much it's going to cost you to buy the property, what your purchase costs are, you know, how much it's going to cost you in interest with the bank, how much it's going to cost you to build, how much it's going to cost for the subdivision. Because that's really varied as well. I mean, I did one in Victoria where it cost about 40,000.

So talk to me about this. What costs 40,000?

Sure. So in Victoria, you get your planning permission, that's about $10,000. You then do all your construction and then you do the subdivision at the end, which is basically just going through the titles office and using your conveyancer and lend. It's all really cheap. You have someone manage the project and it costs about 30 or 40,000.

Wow.

In Brisbane, totally different story. Okay, so that one cost about 120,000.

120,000. Just for the sub?

Just for the subdivision.

No construction.

No construction at all. So basically with that one, you get the planning permission first. You then have to demolish the property, put in all the services, sewerage, driveways, et cetera, et cetera. You then get the subdivision through. So all of that civil construction work.

Is expensive and you have to do that first.

You have to do all that first. Yeah. And you have to pay for it cash because there's no way of you.

Can borrow the money. Oh my gosh.

Yeah. So every state is different. Every council is different.

So does that mean you're only going to do subdivisions in Victoria.

You Know what? Actually, the ones in Brisbane are probably more profitable.

Okay, there we go.

As long as you've got that, you can get the cash to spend money.

Okay, great. All right, so that's the subdivision itself. So you build, then you subdivide at the end and then what happens from there?

Well, then you've got to decide what you want to do with them. And it's probably a good idea to decide before you start what the end goal is. Because when you construct a property, it's going to be different if you're going to tenant it or sell it.

In what sense?

So, for example, if you're going to tenant it, you want low maintenance gardens, you want tiles inside that can't be scratched. You want, you're not going to go all over the place with, you know, your kitchens and your bathrooms and, you know, good quality fittings. Because you're going to tenant it.

Yeah.

If you're going to sell it, you want your waterfall bench tops, you want your nice frameless mirrors, you know, all those things that don't cost a lot but look really nice that are going to get you the extra buck.

And this is potentially somebody's buying this as a home. So you want that emotional attachment that's what you're trying to.

Exactly right.

Spruce up the product a bit.

Exactly right. Exactly right. And you're going to stage the product for, for sale. So you need to make sure that, you know, you all your colors kind of work and that pretty much anything can go inside it.

Okay, that's really, really interesting. How do you go about finding a builder and, you know, choosing the fixing and fittings and all that sort of stuff.

So this is a really tough one because you've got two options when it comes to a builder. You can go with a smaller builder who's probably going to be cheaper, or you can go with a major builder like your metric on JJ Gardens and all that kind of stuff. And they're going to charge you more. But, but with you, with your bigger builders, you know that they're secure in their finances. Right. They're going to finish a product, they're going to finish it fairly quickly. You're going to get something that is, you know, cookie cutter, but it's going to be done.

Yeah.

With your smaller builders, they tend to have some financial issues sometimes and things take longer than was expected or they need payments sooner than what would otherwise have been needed because they need to buy stock and don't have the cash flow to do. So if they've got A lot of things going at the one time. They may run into some problems and timing issues and so things can take longer.

And this is not all of them. This is just.

This is definitely not all of them. Some of them are great.

Yeah.

But you've got to be careful who you pick.

Absolutely.

And it's really difficult to know. Yeah. So if you're going to pick a smaller builder, you need to do reference checking.

Yeah, yeah. Do your due diligence.

Absolutely.

We've actually got a client at the moment whose first progress drawdown is a year overdue because of issues they've had with the builder and just delays and. Exactly what we're talking about. It's a smaller builder and they don't quite have the funding, so there's been a few issues with payments and you just. You're not going to get that with the majors. But like you said, you're going to pay more for it.

Exactly right. But in the long run, that extra may save you money. I mean, my brother did a development in Geelong and that took three years for the construction.

Oh, wow. So three years of holding costs.

Three years of holding costs.

Wow. Okay. So you've chosen your builder, you go through and like you said, you've just got to determine what the end product is to be like, whether you're selling it or renting it. And that will, you know, make your decisions in terms of what the fit out will look like. And other than that, is there anything else people need to be mindful of?

You need to be a bit mindful of what is in fashion because, as you know, colors do tend to change. There are trends.

Yeah.

You know, a few years ago, would.

You say that black tapware is a trend right now?

Black tapware is definitely a trend. I'm not sure how long that one's going to last.

Meanwhile, I've got black tapware all through my hair.

I actually really like it.

Everybody does. Yeah.

So, I mean, brown was really in a few years ago, everything was brown. Now it's more grays. There's a little bit of, you know, blues and greens coming through in terms of, you know, little splashes of color. So it's really important to be aware of what is on trend at the moment because particularly if you're selling, that's going to be very, very important.

Yeah, yeah.

If you're renting, it's probably not so important. You tend to go for more neutral tones. So that.

Yes.

Well, firstly, it doesn't cost a lot to fix it if someone breaks it. And secondly, that way anyone spending check can sort of fit within.

Yes, okay. Absolutely.

Yeah.

All right. So how do you go about financing a project like this?

So it kind of depends on where you're doing it. Let's say Victoria, for example, where you're going to do subdivision at the end of the bill rather than at the beginning. So originally you need to finance the purchase of the property. You then need to pay for your own holding costs and your own subdivision, also planning permission costs while you go through the process of getting the builder. What then happens is once you've got your building contracts ready, you'll submit those to your lender and they will assess the value of the property based on those two or three or whatever buildings being on the same title.

Yeah, as if complete.

As if complete. So what that means is they're looking at, let's say you're building two apartments, they're looking at what would two apartments on one title be worth? Which is a fairly limited market. So the pricing tends to be less than what they would be for two separate units or apartments. So you'll find that there'll be a bit of a shortfall between what your construction costs are and what the bank will lend you.

Okay. So you have to have your own equity.

You need to have your own equity. And depending on the size of the build, I mean, that could be quite significant.

So are there limitations with what lenders will allow you to do two properties on one title?

With two properties on one title? Not really. Even most of them will do three properties on one title. Once you get beyond three, you're looking at commercial.

Interesting. Yeah.

There is only, to my knowledge, one lender that will allow you to do four. Right, okay. And yeah, anything beyond that is commercial lending, which is down to a 60% loan to value ratio. So you need lots of capital.

But if you were in Queensland and you were doing the subdivision up front, the lending would be different then it is.

So again, you need to finance the purchase of the property first, have the cash to do the subdivision, which is your $100,000 or whatever. But then you get your building contracts and because it's already subdivided, you can get all of that money back that you've already put into the subdivision, plus the full construction cost.

Yes.

In the line. So it's kind of a temporary cash.

Flow, short term pay. Yeah. All right. So financing the project. So the lender will then lend against the as if complete project. And usually is it an 80% loan to value ratio or so depending on.

The lender on what you're doing 80% obviously avoids mortgage insurance and most lenders will allow you to have 80%. There are even some who will go to 90. But that's obviously going to depend on your ability to service the loan.

Yeah.

And they're only really going to look at that one if you're a fairly good deal for them.

Yeah. Okay, great.

Because obviously for them there are some risks associated with construction.

And would they include, when they're looking at whether you can service the loan or not, will they look at the potential rental income of both of those properties once they're completed?

So it depends on what your intention is and what you tell them the purpose of the loan is. So if you tell them that you're going to build to sell, then they will not include the rent in your servicing. If the intention is to build to rent, then they will include renting your servicing.

Okay, that's good to know as well. So the big question, what are the risks involved with this sort of project?

Well, there are a few risks involved, but obviously it's going to depend on how much due diligence you put in at the beginning. And the more work you put in at the beginning, the less your risk is going to be. Obviously one of the things you want to make sure that you're doing is buying properties at good value.

Yes.

Because the more that the property costs you, the less your profit is going to be at the end. Particularly if you're buying above market value because you're buying, you know, at auction in an excited market in the area that everybody wants to live in. So obviously buying into high is one of the risks. The construction period and the subdivision period all takes time. So from when you buy the property to when you're ready to sell the property or rent the property, you could have an 18 month, two year lag. So there are holding costs during whatsoever no rental income from once you demolish the house.

Yeah.

Until it's finished building. And if you buy a house that isn't tenantable at the beginning, then you don't even have rental income at the start. So while you're doing the, while you're doing all the subdivision planning, commission, all that sort of stuff. So holding costs are obviously a big one and you need to have the money to be able to do that. If you're buying not in Victoria and you have to do all of the, the, the subdivision first, you need to have a lot of cash to be able to do that. And then obviously, because there is that significant lag time, you don't know what the market's going to be doing two years from when you buy.

Absolutely.

So you might be in a situation where coronavirus hits and nobody is buying.

Yeah.

And there's no international buyers and there's not a huge amount of excitement in.

The market and not as much demand for investment properties.

Exactly. And you run into a situation where you can't sell those properties for what you thought that you would and you end up with maybe less profit or having to change your plan.

Yeah.

So you may have originally looked at selling those properties. Now you're going to hold them for a couple of years and wait for the market to wait. If you can afford to do that.

Yeah.

The last thing you want to be doing is having to sell them at a time where you shouldn't be selling because you can't afford to keep them.

Yeah. Interesting.

Yeah.

We have a lot of clients who have houses already on large lots that could potentially be subdivided. Is that a good, like. Is that. Is that pretty straightforward? It's probably the same type of process and it's just taking away their backyard.

Absolutely. So, again, depending on town planning requirements for that individual council, they'll have minimum lot requirements. But if you've got a backyard where you've got good side access to your property and someone can build in the backyard. Absolutely. That's an option.

Great option.

It's a great option. And you can sell that block of land and pay off your house.

And we've definitely seen it in the past where people have bought houses on large blocks. They've moved into the house itself whilst going through the initial process and then go through, you know, the beginning of the build, et cetera, while still living in the front house.

Absolutely. And then a lot of people move into the back house and sell off the front one.

Paid off. I'll take that. All right, Well, I think this has been plenty of information.

Amazing.

Thank you so much, Chelsea. You're such a wealth of knowledge and it's great to hear from somebody that's actually doing it. Yeah. Looking forward to speaking to you again soon.

Awesome. Thanks for having me.