Jan 26, 2022

So You Think You Can Subdivide

Paul Haigh

My wife Yvette and I began investing in residential property in Adelaide around 5 years ago. Our story is not remarkable, we have not amassed a portfolio of 95 properties worth 49 million dollars and I’m not working 3 hours a week from my yacht moored in Mo’orea Harbour Tahiti just yet. What we have done is acquire 3 investment properties during the last 4-5 years that are all cashflow positive. We did our first subdivision a couple of years ago and we now have a portfolio of 4 homes including our own worth around 2.2 million of which yes, the bank owns with us. We also own and operate our own Property Management company called 4rooms Property specialising in low fixed fee, high service management for investors just like ourselves. Not bad for a few years work and very achievable in my mind, I thought I would outline some of the steps and process we followed with our first project “The Subdivision”.

Step 1: Jump off the cliff

The hardest thing to do was making the first move and taking a risk, after all we are just normal people not property development tycoons! To be honest I had been thinking (procrastinating) about buying an investment property for 10 Years. Finally we plucked up the courage and went to a mortgage broker to see if…

They would laugh at us and tell us not to bother, or
They would help with unlocking the equity in our home and to work out what type of property we could afford to buy as well as how and where to get the finance for it.

Step 2: Buy something

So our friends at the bank said we could have (borrow) some money and we bought a 1950s brick house on 700sqm for 336k complete with bullet holes from a drive-by shooting some years before (I kid you not.) This house was in a suburb around 9km from Adelaide called Blair Athol, an up and coming suburb recently settled by many migrants, the suburb in the last few years has absolutely come alive with business and new building. Our main requirements were that we wanted a block we could subdivide, we also wanted something close to the city and we wanted an area in demand for rental properties. Blair Athol suited these requirements and based on our research from what we could see, many streets and properties were being rejuvenated and redeveloped.

Step 3: Get a good Builder and know the costs

I like smaller builders personally, I found our first (yes first, more on that later) builder on a bus shelter advertisement. I like to be involved and see how things are constructed plus check the progress weekly (this is what I discovered anyway.) Our Builder gave us the design and we tailored the design to suit the size of our block, they put us in touch with the professionals we needed in order to subdivide … such as a conveyancer and a Surveyor and I also sourced a contract lawyer. Now I’m no accountant but we learnt that costs can easily run away from you in this game, so its important to keep a good record of every cent that you’re spending so you know exactly what your total costs are at any given point in time. For your interest I have summarised a few of the basic costs.

Legal fees $550.
Subdivision and surveying $19067.
Conveyancing $1609
demolition $9570
earthworks and retaining $11413
We had to spend a total of $42,209 before we had even started building anything that looked like a couple of houses.

Step 4: Think about your market now and in the future

We were going to rent our properties out but ultimately we thought we might sell them in the future. I’ve often heard that you must treat investment purely as cold hard business and not to get emotionally involved, we were building for people to live in these properties so for us the opposite was true. We believe its important to have a bit of “emotional involvement.”

We opted to put a large open plan living area as opposed to two smaller living areas, we went for 2.7m ceilings as opposed to 2.4m ceilings and we installed a 900mm oven as opposed to a 600mm to give some wow factor. We thought about what we would like in a rental and those little additions gave our simple properties a very spacious feel and a bit of wow factor compared to other builds in the area.

Step 5: Do some of the work yourself if you can

You can get the turnkey style of property where everything is done and you just pick up a key and its ready to go but we elected to source some of the trades and do some of the work ourselves. We did this because not only did we want to save some money but it was enjoyable and we wanted to be connected to what we were building – there’s that “emotional involvement” again. We organised the fencing, air-conditioning, dishwasher, concrete drives and pathways, light fittings, blinds, carpet and laminate floors, porch tiling, pergola and with a few weekends of hard work we also did the landscaping ourselves.

Step 6: There will be road-blocks … go around them or through them

Below are just a few of the roadblocks we faced along the way but I could go on and on.

Finance shouldn’t have been difficult, we both had good wages and had good equity but getting a loan approval for investment is not as easy as you might think from valuations on the existing property and what you want to put on it, filling out forms red tape, lenders mortgage insurance, disputes and bureaucracy (too long of a sentence) This is where the benefit of having a good Mortgage Broker came into play and even with this I spent hours on the phone arguing ridiculous and frivolous points with the bank (that included what type and colour of envelope the loan documents needed to be in when sending them through.)

Don’t knock the old house down without telling the bank – I did this and when Sue from the bank found out …(I could hear the indignation and incredulity in her voice) she was not happy at all! Luckily the subdivision had gone through and the improved value of the land was more than the original property anyway, so again after many frivolous and pointless conversations with people in pointless jobs at the bank – things were ok.
We also needed a retaining wall! What I thought was pretty much a flat block wasn’t, we required around 40 meters of retaining wall so prepare for the unexpected.

Our Builder (not a real small builder) went bust a week before we were due to start the foundations … yep what a disaster. We were lucky as we had not paid them a cent, they had drawn all the plans lodged with council for approval, completed the engineering etc as part of their initial deal of no charge up front which is probably why they went bust. We were able to claim through builders indemnity insurance on the costs of shifting to a new builder but it costs us time, money and delayed the build by a couple of months. You would think that the bank would simply be able to work with the new builder and things would be ok and after many more frivolous conversations between us, our broker and the bank they agreed until … someone pushed the wrong button (I kid you not an actual button.) This triggered a whole series of events including a new application, new valuations with a new value coming in slightly under previous valuations and triggering Lenders mortgage Insurance of around $5000 extra (paying this is like going out to the front of your house and throwing $100 notes onto the road!)

Step 7: Don’t give up …keep moving

We got there in the end and you will too! Doing the subdivision wasn’t easy but it was a lot of fun and we would do it again. We learnt a lot and the reality is we kept moving because we had to …there was too much at stake. We found solutions to the roadblocks because there’s always a solution. It took 18 months from start to finish and we estimate we would make a profit of around 120k if we sold the houses.

We won’t sell in the near future though, we see these properties as many people do as a nest egg for the future to supplement our super, along with the free meals we expect our kids to provide. Doing the subdivision fanned an interest I have always had in property and we went on to purchase another home on 700sqm in Brahma Lodge, north of Adelaide. This one is a corner block and is cash flow positive for us at the moment but I’m eying it off for our next project/adventure in the not too distant future.

Step 8: Learn something

These projects even sparked a new career for me, I studied for and obtained a Land Agents License and I now work full time as owner of my own Property Management Company “4rooms Property.” For me its not only about making money, its about finding something I’m passionate for, interested in and care about and that’s turned out to be property.