What Are Property Subdivisions (And the Pros and Cons of Doing It)
In some cases, a property subdivision can help you get the most out of your development. Have a look at whether this can be a suitable tactic for you.
Property development is a complex and costly venture. Every developer wants to be certain that they’ll maximise their project’s profitability.
Luckily, there are lots of ways to do it. And subdivisions are among the best.
However, subdividing a property isn’t a decision that you should take lightly. There are many factors to consider and it doesn’t come without challenges.
This article will help you understand if a subdivision can help you achieve your development goals. Before that, let’s see how the strategy works.
What Are Property Subdivisions?
Simply put, a subdivision is an act of splitting one parcel of land into multiple lots. It’s a common practice in property development that allows you to convert a plot of land to two or more.
When you subdivide the land, each new lot has its own property record entries. The local authorities dictate if and how this can happen. Depending on where you’re developing, you’ll have different regulations related to subdivisions.
To subdivide a property, you must present the plan to the local authority. The plan serves as proof that your subdivision complies with all the necessary regulations. These regulations include land use, access to roads and utilities, and other important rules.
The application process will depend on the area that you’ve invested in. Regulations can vary greatly and you just have to comply with all. Because of this, it can make sense to consult the local authority before you subdivide.
Outside of the legal aspect, there are other factors that you should take into account. Let’s go ahead and weigh the pros and cons of subdividing a property.
The Pros of Subdivisions
Under the right circumstances, a subdivision can offer a range of benefits.
1. Potentially Higher Profits
One of the reasons to go for a subdivision is the opportunity to boost a project’s performance and profitability. There are many ways to do this, too.
For instance, you can develop different buildings to target different types of tenants or buyers. Alternatively, you can split the land into two, build on one part of it, and sell the other for instant profit.
Of course, you’ll need accurate projections before you arrive at any decisions. But generally speaking, subdivisions can unlock more profits if done properly.
2. It Could Be a Quick Way to Expand Your Property Portfolio
When you buy a piece of land, you’ll be focusing on a single development. There’s nothing wrong with this. However, it might limit your portfolio’s potential.
Subdividing allows you to build new properties on those separate parcels of land. As mentioned, you can develop different building types to diversify your portfolio. This would derisk the portfolio and set it up for future performance.
3. Investors Can Boost Cash Flow with Subdivisions
In property development, having enough cash on hand is vital to success. You never know if you’ll need to take immediate action. Besides, the whole point of investing is to create stable revenue streams.
Aim to get as much cash as you can from your developments even if you plan to sell at some point.
Subdivisions can be a great way to improve your cash flow. You can sell off properties or blocks of land to pay for any debt that may be affecting your financial performance.
The Cons of Subdivisions
Even though it can be beneficial, a subdivision isn’t suitable for every situation. It comes with a set of challenges that might not be worth your time and money.
1. You May Face Unexpected Costs
Getting a subdivision approval can be a long and costly process in some cases. Even after that, you might still encounter unpleasant surprises.
For example, you might have to change the terrain in some way to be able to build your proposed properties. You might also run into challenges with services like water and sewage.
As you can imagine, such challenges can cost a lot. This only reinforces the conventional wisdom that developers should always have cash reserves.
2. You May Need to Extend Project Lead Times
Subdivisions take much longer to complete than mere renovations and similar strategies. There’s a lot more paperwork involved, to begin with.
On top of that, you might run into objections from the local community. You may have all the approvals, but the neighbours can still make it tough for you.
All of this can add more time and work to your project. With this comes the risk of not being able to complete the project in the estimated timeframe. And as you know, every delay adds to the overall costs.
3. Subdividing Can Reduce the Value of Large Properties
Let’s say that you subdivide a piece of land and build a large property on one parcel. To make up for the costs, you sell the other block.
While this would make financial sense, it could also lower the value of your property. Potential buyers might not be able to meet their goals with less surrounding land. What this means is that you might have to sacrifice long-term profits.
Consider Your Options
As you can see, subdivisions can be an effective strategy for some developers. But this doesn’t make it the best strategy for everyone, and certainly not every time. Depending on your project’s specs, another strategy might turn out better.
But how do you know if a subdivision suits your project?
That’s what Archistar can help you with.
The platform can visualise subdivisions and assess for feasibility to let you see if they make sense for your project. It can also help you do your research to avoid running into issues with local authorities.
To see how Archistar does this, and so much more, schedule a free demo today.