Many property investors are familiar with different property types including established homes, townhouses and apartments, renovation, land and build and short, or long-term off the plan purchases. There is another class of property investment called small scale property development, or SSPD that can improve your returns even further when used at the ideal point in your investing strategy, however, it is of course more complex and has additional risks, so as with all investing, it’s important to understand it well enough to judge if and when its ideal for you.
A SSPD generally involves creating more than one smaller property out of one larger property where council rules allow it. It is not just renovating an older property, or adding a level or additional bedroom. SSPD is generally buying a smaller block of land with an old house where the land is zoned for medium density, then subdividing the land into two or more pieces of land with appropriate dwellings such as townhouses or a small unit block built.
When undertaking SSPD in the more affordable cities that are forecast for more growth than Sydney, such as Brisbane and Adelaide, a suitable old house on a larger block of around 600 square meters can be purchased in 2023 for around $750,000, then three townhouses can be built for $300,000 each, so the total cost per dwelling is $550,000 but typically worth circa $650,000 plus any capital growth when complete after approximately 2 – 3 years.
We generally consider small scale property development to be $1 – 5M total cost, medium $5 – $10M and large, anything above $10M.
These small-scale developments can be lucrative for investors when done well in growing markets, providing a return on investment of up to 100 per cent per annum on the cash or equity needed if all things go well, but there are more costs, variables, time and risks involved, so it’s important to get good advice and experienced support throughout the process to get returns that high. Returns of 40 – 80% pa are more typical when the property market is growing by 10%, when borrowing 60 – 80% of the cost of the project.
Projects including duplex or triplex’s, townhouse developments, block splits and subdivisions are all great opportunities for investors to increase cash flow and capital growth. With careful planning, strategic site acquisition and thorough project management you can:
- Achieve returns as high as 35 per cent through combined development profit and capital growth
- Higher than average rental returns
- Better leverage on cash or equity due to increased value on completion and different lending rules when equity exceeds normal lender borrowing capacity.
- Potential tax benefits
When completed well, SSPD can help you achieve high-growth and higher yield properties at wholesale prices (as you purchase the land and develop the site yourself rather than purchasing the property from a developer). In turn, this can assist to build your property portfolio faster.
Key steps in the small-scale development process
Undertaking a SSPD requires a lot of time, attention and planning. Having an experienced team of professionals and experts around you and involved in the project not only minimises the time you need to dedicate and risk, but it also gives you the best opportunity for the project to run smoothly, to schedule and produce high returns.
Some key phases throughout the small-scale development process are –
- Pre-Purchase – Seach and Assess
- Negotiating Contracts and Purchase
- Town Planning and Development Approvals
- Documentation and Working Drawings
- Pre-Construction
- Site Preparation and Payment Schedule
- Project Construction
- Completion and Hand Over
- Post Completion – Sell some or all or refinance
Depending on your strategy and plans for the site, at post completion the properties are either put on the market for sale to realise the development profit, or retained, refinanced, usually with equity released and leased out as part of your investment property portfolio.
Who and When is Small Scale Property Development Ideal for?
SSPD is typically ideal for more experienced investors who have started to reach their borrowing capacity limits with traditional residential property lenders, who have invested in three or more normal investment properties, and have more equity and leverage appetite than the traditional lender will allow access too.
The main benefit when compared to normal property investment, is that you can continue to leverage and value add when you have enough equity, so you can continue to leverage your returns, sell out of markets when they are close to their peak, and reinvest that capital and leverage into markets at the start of their growth cycle with higher yields. You can even borrow for development when you have no other income, as it can be based on just the equity and likely sale values when complete.
You can even borrow all of the costs including interest when you have enough equity, plus borrow extra cash as a safety net buffer. You can also outsource virtually everything and still make a good profit when you have the right team, so you can virtually become and armchair developer!
This can allow you to semi – or fully retire 5 – 10 years earlier with a much better lifestyle than typically possible, so it’s very much worth learning how to get your property portfolio and knowledge to the point where small-scale property development is ideal for you.
More detail, case studies and property investment tips can be found by scanning the following QR Code:
Case Study
Location: Brisbane, QLD
Property: Land with “Old Queenslander”
Development: renovate Queenslander, add 3 x 2-bedroom town homes
Return on Investment: 50% ($1.4 million)
A long-term client of inSynergy who had approached their maximum borrowing capacity with lenders for standard residential property investment undertook a small-scale development project in a lifestyle location close to Brisbane CBD. The clients were able to obtain finance for this project due to their equity position and servicing being based on site feasibility. As long as the site feasibility stacks up, the gross realised value of the property is lent against, the mortgage doesn’t need to be serviced via income as it does with a standard residential property investment.
In early 2020 the client purchased a block with an existing “Old Queenslander” property on it. The plan was to renovate the existing dwelling and relocate it to the front of the block and add three 2-bedroom townhomes to the site. At the end of the renovation and build, the client would have four dwellings to either sell or lease out.
inSynergy assisted the client throughout the process, ensuring the right team was involved and providing support during the challenges of the Covid lockdowns, building and supply issues and staff shortages.
The project took three years to complete in early 2023 achieving an incredible result for the client with a return on investment of approximately 50 per cent equating to $1.4 million in equity.
As a specialised property wealth planning business, inSynergy continues to work with clients on their investment journey. Small Scale Developments are proving to be a great way to extend and expand a clients property portfolio, especially as they near borrowing capacity and/or accumulate wealth.
There are many moving parts to property development, and it is the responsibility of the project team on the ground to help and guide you through the process. We have assembled local teams across the country looking for the best opportunities and locations as well as identifying the right builders and professionals to execute on the specific requirements of the client and the property. As always, it is inSynergy’s objective to ensure you are fully informed and supported through your investment journey in the safest way possible.