How to Make Money Subdividing Property in Western Australia
Five tips to maximise your profits by developing and subdividing land.
As subdivision and property development consultants, we have a lot of people asking us how to make money subdividing property in Western Australia. How do we maximise our returns? What makes a good deal? These are everyones favourite questions. There is an art however to making money as a developer. Whether you are subdividing, renovating, building, or doing a combination of all three, there are some underlying principles and strategic processes that you need to know. This article will explain the top five principles that will help you to make money subdividing and developing property. It is very important to understand these processes and pointers, and keep them front of mind in your property development endeavours. If you do, you will be able to maximise your profits on every development you undertake.
Before you think about how to make money subdividing property you need to think about your goals. Goal setting is important, it guides the subdivision and development strategy. As the saying goes – “ failing to plan is planning to fail”. I often say to my clients to begin with the end goal in mind. More often than not, this is to make a profit. To help with that end, you need to think about preparation, preparation, preparation. The tips shared in this article will show you that learning how to make money subdividing property is all about planning at the front end of a project- delivery is the easy bit. What you do before you start is what makes you your return, not during the project. Your five tips for executing successful developments:
1. Learn the planning rules and regulations
Before you start looking for development sites, you need to educate yourself on the state planning regulations and rule that affect subdivision and development, as well as the specific local government planning rules and regulations that supplement these, relevant to the suburbs and areas that you are hunting for a development site in. This is step one of how to make money subdividing property. You need to understand the rules because this way you can determine the sites correct development potential all by yourself (ie. how many lots you can make, size and types of dwellings etc), without relying on the potentially erroneous opinions and advice from builders, real estate agents or council officers. More to the point, this may in fact allow you to see development opportunity in sites that other buyers (and the seller) may even have missed, allowing you to pay below market rate ad get a bargain. Knowing the rules allows you to avoid costly mistakes, and find hidden goldmines. An example is provided below:
This is a 1042 square meter R30 corner site in Como, South Perth, advertised by the agent as a triplex site, “subject to council approval”. The site area requirements are lots with a minimum of 260m2 and an average of 300m2 at the R30 coding, against which both would normally require compliance. So there is enough here to do only 3 lots, as 1200m2 would be required to get 4 x the average (there is only 1042m2) . On face value there is not enough here for 4 lots, however under the corner lot provisions of State planning policy DC2.2, corner lots between R10-R35 with frontage to two separately named streets that are not major or regional carrier roads need comply with the minimum site area requirements only. So, 4 x 260 =1040m2, to which we can comply given the total area of the parent lot. Applying this knowledge, we were able to assist a client to acquire a 4 unit site, advertised as a 3, for a steal.
2. You need to engineer a profitable design solution before you commit
What is the most profitable design solution for your development? You need to go through a process to determine which (if any) profitable design solutions exist, and you want to determine that before you commit to the purchase. This means feasibility studies and due diligence. This means researching the local market, supply and demand, and the planning regs in the local area. This usually means spending some money and time on concept design solutions, costing them, and getting them valued. And it can mean working out there is no profitable design solution for that site at the current asking price, and walking away from the deal. Better to work this out early ands save yourself the hassle of a unprofitable and possible even loss making project early, rather than committing based on guesses, hopes and delusion. Every site is unique, and cookie cutter approaches to finding a profitable design solution are not good enough if you want to be successful. Accept that part of making money is spending time, effort and money on engineering the best design solution for every site you want to close on, and that you may look at several sites before you settle on the one that tis right for you.
3. use market research to determine what to develop
You need to determine what types of product (eg. 2×2, 3×2, 4×2, single or two storey) and product features are selling well in the area you are looking at sites in. You need to study the micro and macro economic supply factors for that market, and use it to guide your design solution regarding what product you are going to offer to market ( ie. dwelling types, design features and lot sizes). This is evolving and always changing in, but important for you to study if you wan to know how to make money subdividing property. If you present the right product type to a market a the right time, so a segment that is undersupplied and has buyers who are willing and able to buy the product, you will sell product fast and for a premium. So, to maximise profits, do the market research, speak to local agents, get professional advice and design input- the market dictates what to supply to it, not you.
4. Paying the residual land value is how to make money subdividing property
The easiest and most logical place to make up the desired profit margin on a development is in the acquisition price of the development site. You need the purchase price of the development site to accomodate the desired return on investment. The key to understanding how to make money subdividing property therefore is learning to reduce an offer to reflect a required Residual Value to meet you ROI target.
For example, if the forecast indicates that an extra $50,000 profit is needed to make the deal stack up, so simply offer $50,000 less for the property you are trying to purchase for the development.
Construction and development costs are mostly fixed; your market research and site constraints determine what type and quality of dwelling you have to construct. Offering cheaper, inferior product to market in order to save on costs and increase the margin may work on paper, however you are only deluding yourself- this will only affect sales negatively at the other end of the project.
Likewise, being over-optimistic and inflating sales prices in your spreadsheet without evidence to increase margin is erroneous and dangerous. You are only deluding yourself again. To re-emphasise; your developer margin comes from paying the right price for the site at the start. If your feasibility research data tells you that you need to pay less for a site then you need to reflect those findings on your offer to the vendor. It is a reality that many of the sites on which you will be performing due diligence will be overpriced from a development perspective. This is often the case in newly rezoned areas where owner-occupiers are the vendor and they are seeking to ‘cash in’ on the opportunity. If they won’t settle on a lower price to cover your risk and margin, walk away.
5. Choose the right builder
After you manage to settle on a site because you have designed and engineered a profitable design solution, its important to be working with the best builder possible to deliver the design outcome. The best builders re the ones who understand the economics, process and efficiency requirements of development. Building for a developer is very different to building for a homeowner- the deliverables are completely different. You want a builder with a track record of achieving delivery excellence for developers. This means a builder that will work with you to find cost savings that dont compromise quality, offers a fixed price construction contract with no variations, a builder who is organised and understands that time is money, a builder that is solvent, insured and has the capacity to give your job priority, attention and supervision. To maximise your profits and secure the return on investment based on the design you have engineered, it is paramount you appoint the right builder to deliver on agreed time, cost and quality parameters. If you get the wrong builder the job will be late, over budget and wont achieve the sales price expectations desired.
Profiting from subdivision and development is easy if you understand processes and principles behind sourcing, planning and delivering your projects. It takes commitment, time and effort though on your part to learn how to do this. If you dont, the consequences speak for themselves- you wont be able to capitalise on the best opportunities, you wont be able to maximise returns, and will likely spend your time committing to the wrong projects, working with the wrong builders, that dont make you much money at all.
If you are serious about becoming an expert on how to make money subdividing property and developing in Western Australia, you need to learn about the planning rules and regulations. You need to learn about feasibility studies and how to profit engineer, you need to learn about studying the market, and choosing your builder. All of this is covered in our 225 page Infill Property Developer Guide-book and correlating Online Course. Get started today!