One of the ways an investor can use to develop a property is through a subdivision. It normally involves a property developer taking a single piece of land and subdividing it into several parts. A single raw land that is undeveloped can be developed into so that several residential, industrial or commercial buildings can be constructed. Existing buildings that have a single title can be converted into multiple titles.
What entails a subdivision loan?
Sometimes the cost of subdividing the land into several blocks can be hefty for a single property developer to manage. The suitable way to cover the costs of such a subdivision activity is to source a subdivision loan. A subdivision loan is usually structured in several ways since each subdivision project has unique and different requirements.
Costs that a subdivision loans cover are
- Land subdivision costs that entail charges and fees.
- Surveyor’s costs
- Demolition of a pre-existing structure
- Construction of new buildings on subdivided lots.
- Building infrastructure that will ease approval of the subdivision loan.
Under the subdivision loans, the land can be used as a security or any existing building in that land. You should consider involving a mortgage broker to assist you to find the financing that caters for the needs of the subdivision project.
Subdivision loan features
Security for the loan: the block of land or the existing building is usually enough security in many subdivision loans. But, in most cases security usually comes from the buildings intended to be developed in the subdivided properties.
Interest rates: mortgage lenders usually offer normal interest rates for standard loans.
- LVR: In many cases, most lenders allow an LVR of up to 90% on the properties or security, but the amount usually varies depending on the financial situation or the lender.
- Construction aspect: Some loans have a construction feature to ease the setting up of new buildings in subdivided lots. It will allow you to pay the builder for each construction process stage.
- Dwelling: Usually a subdivision loan accommodates up to three buildings on a particular subdivided land. Otherwise, a commercial loan will normally be sought where larger projects need funding.
- Requirements for Lending: During the application process, it will be necessary to give copies of surveys and council approvals. If you provide such information, you will convince the lender to approve the subdivision loan.
Benefits of subdividing a property
If an investor possesses a large chunk of property in a well-positioned suburb it possible to benefit more through subdividing it. Through further dividing the huge land into several lots that are later sold can greatly increase the land value. For instance, take a block of land that is valued at $2m which is later subdivided into 3 segments of which each is sold at $1.2 million- an investor will be able to get a total of $3.6 m from the land.
The property owner has the option of keeping one lot instead of selling it and selling the others. Other subdivision options entail taking a single strata title so as to split it into multiple titles.
Subdividing properties is beneficial as it becomes more affordable to maintain the property than a single block unit of land. Therefore subdivision is a good approach where there is land, and you need to expand, increase equity or build a wealth property portfolio. However, before making that decision to subdivide the property, a lot will be taken into account.
Considerations when taking subdivision loans
The actual lending process is usually determined by several factors. Before you sign any contract when applying for the loan, it is crucial to consider the following:
Size is crucial: Usually, the minimal size that a single property can be subdivided is usually dictated by the local council which in most cases is usually 700 square meters.
A leveled land is good: It is cheaper and easier to subdivide a flat land as compared to a sloping land. It is also to be seen that you will tend to limit future development when you select a sloped sites. Likewise, subdividing a battle-axe or L-shaped block is harder than subdividing rectangular or square block.
Corner blocks are suitable: It is easy to create access when subdividing corner blocks through a subdivision. But, it will involve extra costs for the properties.
Capital Gain Tax: CGT will not be an issue when you subdivide the property and retain ownership of the individual land blocks. However, CGT factor should be imputed into the cost equation if you decide to sell each of the subdivided blocks which may accrue a capital loss or gain.
Fees: It might be costly to subdivide a land block as it involves infrastructure charges and solicitor and surveyor’s charges. It would be wise to take into consideration the project’s full cost before undertaking it.
Demolition expenses: Examine whether the building currently mounted in the property will be able to remain intact after the split of the property into several slots. If the building doesn’t, you will need to demolish and that is an additional cost. Find out whether the demolition costs when the land is subdivided will make the venture profitable.
Costly connection; The cost of the utilities for new lots is another crucial expense to take into consideration. It can be prohibitively expensive to mount adequate storm water drainage and sewerage connections.
Costs of loan: When trying to calculate the amount of loan to acquire subdivision loan charges and fees like interest costs, ongoing fees, and application fees, ought to be put into consideration.
Knowledge before purchase: Take due diligence to investigate the property you intend to subdivide to ascertain the level of difficulty of the subdivision. So as to successfully stand out through the whole work, carefully research on the planning and approval procedure. It will be good if you see there are plenty of subdivided properties around.
Rules of zoning: When you want to purchase a given property, check whether the zoning regulations and rules allow you to set up a high-density structure on a particular block of land.
Inquire an expert: An expert will explain to you the possible dos and don’ts with regard to the property since the expert, especially a surveyor knows the council’s regulations regarding planning and development. A licensed surveyor will thus minimize the stress involved in the subdivision and raise the approval chances.