The recurring property investor’s question – subdivided and build or just sell the land?
Currently small & first time property investors along with experienced property investors are very active in the market, trying to increase their wealth by purchasing land that is of a size that they can add value to by subdividing.
One of the questions that first time and small property investors always ask &/or contemplate is whether following the subdivision process they are better off selling the lots or building on them before selling or alternatively building and retaining all or some of the properties. Ever situation is different and so it’s not possible to make a blanket statement one way or the other. However, a good starting point is to understand the major pros and cons of each option.
Selling the land
For the developer, selling the subdivided lots means an immediate cash injection and the potential to quickly move on to another project. This is assuming that the lots can be sold without too much difficulty, this is not always the case.
It’s possible to make a reasonable profit using this strategy, however most success stories involve the developer holding the property for some time before developing. It can be difficult to get top dollar because it’s relatively easy to compare one lot with another and buyers will probably be looking to make a profit themselves. Selling subdivided lots works better in areas where there is a scarcity of land and higher density living is common.
Creative strategies may involve selling the land with approved plans and permits in place, or by working with a builder to advertise the property as a home and land package.
Building and then selling
On the surface, building is a riskier option on the sense that the developer must fund the cost of the construction. There is also the added hassle and long time frames to consider. The longer time frame will increase holding costs which in turn will impact on your profitability.
The profit will generally be greater than when selling the land on its own, partly because the building process should add value beyond the cost of the construction. Plus, it’s easier to achieve a strong price when selling a beautiful brand new home to an emotional buyer.
Building creates additional opportunities. If, for instance, it becomes difficult to sell the completed homes there is the potential to hold the properties and benefit from rental income and depreciation allowances.
Building and retaining
This option is similar to the above “building then selling”, and carries similar risk however this option really gets down to:
- cash flow, your ability long term to meet the finance commitment associated with keeping the completed properties;
- desire to generate long term wealth rather than short term profits and need to constantly keep undertaking new developments to generate wealth;
- preparedness to carry debt, some people are more comfortable with debt than others.
Many investors look to retain the properties they develop so that in the long term they can benefit from capital gain as well as the income stream the properties generate through rental income. Others will retain some of the properties and sell the others with a view of having the cash flow of the development either neutrally or positively geared.
Determining which option is right for your particular circumstances involves detailed calculations including the likely end values and various costs that will be incurred, while also taking into account the risk and effort involved. Critically there are also tax implications which may dramatically affect your decision. Therefore, you should talk to your accountant and other professionals before doing anything.