Changes in population density or “R-codes” have created a new option for many smaller investors, allowing them entry to a new investment market—property development. Traditionally, small investors would buy a property, make nominal improvements and wait for it to increase in value.
Until the R-code changeTs, property development was usually cost-prohibitive for the small investor. Now that smaller properties can have two residences, there is a lot of opportunity for the small investor to buy properties that were ineligible for subdivision before the changes but are now eligible.
For many in the Perth area, traditional investing is a great vehicle for creating a cosy nest egg for early retirement. Some small investors eventually become large investors if they do everything right and get a few breaks along the way. Traditional investing works but only if you have patience. For those who want to grow faster, subdividing provides a great opportunity.
The Development Model
A simplified version of the subdivision development model for a small investor: buy a property with one dwelling that is now zoned to allow two, and build the second dwelling. It works great in the long term and also works so well in the short term that it allows small investors to be more aggressive. A variation of this is to buy a vacant lot that is zone for two homes, subdivide and build two homes.
Because of costs such as property management fees, repairs, maintenance, taxes and insurance, not to mention interest rates, it is difficult to maintain positive cash flow on many traditional, one-dwelling properties, creating negative gearing for the first few years. This makes it difficult for a small investor to “cash in” without holding a property for at least 5 years.
On the other hand, subdividing a property can create as much as $100,000 in equity within one year. Better yet, if you decide to hang on to the property long term, you can collect rent and enjoy capital gains and positive cash flow on two residences instead of one.
Smartline Mortgage Brokers Rockingham Can Help You
Justin Smith is a mortgage broker with over 25 years in the business who specialises in home loans in the Kwinana, Baldivis and Rockingham areas. Call 0408 912 244 today.
