2 types of value adds for a property
As the Sydney and Melbourne markets start to cool down, more and more investors are looking at ways to manufacture equity themselves rather than wait for the markets to grow organically, so let’s look at different types of value adds that an investor can implement in order to propel their business further!
Subdivide and build
Subdivision is the process of splitting one block of land into two or more smaller chunks. Every state, every council has their own criteria for subdivision.
For example, the Logan council in Queensland requires a minimum size of 750 square metres for a corner block, or 1,000 square metres for a standard block.
There could also be criteria for frontage, so it is important to do your own due diligence to check these criteria before purchasing a block rather than blindly trust an advertisement that says has “subdivision potential”.
I have also seen some investors buy a subdividable block, got through to DA approval and then simply sell the block for others to complete the subdivision process.
There is a value-add opportunity here even by just obtaining the DA approval, simply because they have spotted the opportunity that the block has subdivision potential and went through the DA approval process.
Instead of continuing on and executing the split, they may decide to leave the remaining work to someone else and just take the profit as is.
And then there are the investors who will obtain DA approval and then continue on to completing the subdivision process. If the property cycle is in a rising market, then an investor could sell the subdivided block for a good profit once the electricity/gas/water has been connected. From that point, someone can essentially take the vacant land and organise a builder to design and build the house.
So, there are quite a few exit points using this strategy depending on how comfortable an investor is with this process and his/her risk appetite.
Building out downstairs (dual-level occupancy)
This is the type of value add that is more unique to Queensland properties, in particular South East Queensland. They do exist in other areas, too, but they are predominantly known as “highsets” in Queensland terms.
In Queensland, whether downstairs are legal height or not, they have the potential to be built out and transformed into a fully functional level, including the living area, kitchen, bathroom and bedrooms.
If downstairs is not at the legal height, then they will not be able to be leased out separately, but they can suit demographics that have big family requirements.
Depending on what the structure is downstairs and what has been completed already, it may cost $50K to $100K to build out underneath, so it’s quite an investment. But in Logan, for example, a fully built-out highset does present its own unique proposition and would usually provide an additional $100 to $200 a week in rent (in comparison with a highset that does not have downstairs built out) depending on build quality, how many bedrooms and available space. This would increase cash flow return and make the property easier to hold. There will also be some potential for equity gains to be made.
Given not all land is set for a granny flat, building out downstairs may be an alternative option for investors to consider.
