Recently, I talked about “Smart Subdivision Strategies” in this space and how to create value and manufacture growth out of property you already own or are in a JV with a partner’s property. After receiving more than a few questions from you about the subdivision process, I thought it might help to go into it a little bit more….
Now, before I get another Platinum telling me, “Oh, I’ve got this property in this or that town and I’m going to subdivide and make a ton of money and all of that,” you need to show me the figures. You need to know that it’s worth doing.
Now mind you, I don’t want to discourage anyone in any way by reminding you of this, I just want you to have clarity in the viability of your project in every aspect. When it’s done correctly, subdividing a property of a block of land is a fantastic way to add value and equity with relatively little cost.
On the other hand, before you go out and buy a block of land somewhere, figuring it’s large enough to build another PPR or a duplex on it, or find a JV partner with a big block of land and nothing on it, make sure that it can, in fact, be done. There might just be a good reason why is hasn’t been done. More about that in a moment…
If it hasn’t been done, find out why
Of course, as students of mine, you know that you need to do your due diligence on any deal. You shouldn’t take anyone else’s word for anything; you need to find out for yourself. You need to know the figures for yourself. But even beyond and before all of that, you need to do a feasibility study for your project. You need to know what the local authorities and other parties involved will have to say about your project.
That means starting backwards in the process. You begin with comparable sales analysis to see if there’s a market for what you want to do and what that market really is. Will the market, for example, support the costs involved in subdividing and/or doing the build out? Hopefully it will. If it doesn’t, then you know it and you don’t waste anymore time or money on the project.
Know the local council’s tolerance
Finding out what the subdivision tolerance in the area is another biggie that you will need to uncover. The market price for homes and rentals and the subdivision project you have in mind may be all simply perfect, but what if the ratio of property subdivision approvals in the area is low? What if the council rarely gives approvals for what you want to do?
That is something you definitely need to know as well before you spend a lot of time and money. In other words, you need to know how easy—or hard—it’s going to be to get council approval for your subdivision project. A good place to start, of course, is the internet.
Go onto the council websites to find out what the current town plans are and what the future town plans are. They will tell you about what rail systems may be coming in, what large development may be on the board, where this hospital or that shopping center are going to be built and when.
Council websites will also have statistical data on neighborhoods, types of businesses that exist or that they would like to exist in those areas, which neighborhoods are experiencing growth, which are not, and all the rest. This is very important for your next task, which is grid variance analysis.
Use grid variance analysis!
For example, with grid variance analysis, you need to find actual data on what the variances are in the area of interest to you. What kind of development is taking place or is already in place. Are upscale housing developments there? Are there gated communities and/or nicer properties near the beach area or other desirable spots? Are there more modest housing estates surrounding the outlying areas? Are there townhomes of blocks of flats in the city centre or on the outskirts of town?
All of these different types of structures and neighborhoods should be evident and even expanding in your area of interest. When this is the case, you know that there’s a dynamic economy there and you can see the plans the council has in mind going forward. This makes for an attractive area to invest your time and money and create value where there is a market for it.
Economic dynamism is the key
You want to make sure as well that the area has some good infrastructure around it. The roads are good in the town and leading into and out of town. You want to see some real dynamism in the ‘burbs, as I like to call them, where new housing is going in, improvements in centres of commerce are visible.
On the other hand, if there is little or no grid variance, and there are no real, tangible plans on the council level for development, you want to avoid committing too many resources to those areas. You want to be involved in areas that have some dynamism to their economy and the city or town. A stagnant area doesn’t allow for real growth in value.
In essence, you want to see economic dynamism in the area, with high-end areas as well as lots of mid-range properties. You also want to see lots of precedence of subdivisions taking place. You do not want to be a trailblazer, but rather, just one more investor subdividing a block of land in a dynamic area. Your area of investment should have a council that is relatively easy to work with, with zoning approvals relatively easy to obtain.
These steps are what you need to do early in the subdivision process. Now, it is true that you want to be creating value regardless of what the market is doing; you want the value to be created in your project by your efforts. But your due diligence process will allow you to position yourself in deals that work in both scenarios, especially in a subdivision deal. You want to be working with the market, with the local council, with the development trends, not against them!