Afternoon brains trust. Hoping for some advice on a subdivision strategy. (not the process of subdivision). Looking to invest in my first property that has subdivision potential, at some point I will split the block into 2 (battle axe). My question is what happens to the finance on the property during this process? I have separate funds to finance the subdivision. Obviously the front house will be worth less afterwards. Does this trigger a refinance? If I decided to sell the rear block rather than develop, have people used these funds to pay off PPOR debt? (after taxes etc). Seems like a fast tracked strategy for paying out my non deductible debt. Thanks Rob
The lender will look at the value of the security compared to the loan amount. You should think about the tax consequences to structuring the loans. see Tax Tip 93: Subdividing Property and Deductibility of Interest Tax Tip 93: Subdividing Property and Deductibility of Interest
I got caught with this. Subdivided PPOR, sold the block and at settlement the bank automatically and without consultation used the funds to close out the mortgage on the PPOR. Our instructions were for the funds to be deposited into an account.To make things worse I was planning to turn the property into an IP and all of a sudden there was no debt on it. If LVR was an issue I could understand them needing to adjust the loan (after consultation) but the LVR on the remaining property was about 10%! Willy
Thanks Terry, good read. This is slightly different in that being an IP the deductability should not be in doubt. But if i understand it correctly, the investment loan will be split into 2, so if I sell the rear land the bank will want to payout that split from the sale funds.
The last one I did I called the bank well in advance to tell them what I was doing and advised I wanted 80% debt left on whatever the val was for the front half (pre existing house) - they sent out a valuer and market growth meant the original loan was fine to stay. I was glad I set it up in advance as initially they seemed worried about security valuation but the more info I gave them the less stressed they seemed. If the market growth hadn't been there I would have had to set up a smaller loan on the block as well and split the loans proportionately. In the end effectively I got a block with no debt just for the cash cost of the subdivision which was around $36-37k.
In hindsight I wasn't clear enough in my instructions to the bank. There was $35k owing on a $360k property with a loan limit of $200k. When the bank didn't bring up any issue prior to settlement I just assumed it was because there was sufficient security in the remaining property. Never assume anything! Willy
If you don’t subdivide first then the banks will value your property as 2 houses on 1 lot. You can imagine these aren’t all that common for comparable so expect at least 20% off EMV. Meaning say each standalone property is worth 500k so EMV is 1mil. Expect the value to be returned at 800k so you will need a lot of equity. If you subdivide first then you will need a 173 agreement (In VIC anyway). Once that is done though you can just get 2 separate loans secured against each Lot. If you choose not to build then you can just sell the lot and close the loan with the proceeds. The excess funds can then be used to pay down the remaining loan.
And yes it’s a brilliant strategy. The best for active investors who are not as keen to take on the risk of full blown developments. You can maximize your returns by living in the existing house and also renovating it. I did this and built out the back and moved into that.
Hi @albanga ^^ We're about to embark on exactly this actually. Regarding the subdivision element, do you need to get planning permits (IE, showing the build) THEN S173, or can you simply have a land subdivision plan drawn up by a surveyor and enter a S173 on that basis? Interested from a cashflow/equity position as we may not be able to fund the renovation AND the drawings/subdivision/services works simultaneously, however our understanding is an S173 is valued as two lots, meaning we can release a bit of equity and move forward on that basis. Thanks in advance.
The 173 is what allows for the subdivision to take place before the construction. You will need the building plans and permits first as there is no agreement to enter into without those. A 173 is a legal caveat which basically protects the council by saying you will only do with the land what the permits says. It prevents people from subdividing land without approved plans and being stuck with a vacant lot of useless land. I know 173s can be used for other things as well.
In the 4-5 councils we do this on a regular basis in NSW it is referred to as "Dual Occupancy Subdivision" where council allows smaller min lot size and other concessions to do a 1 into 2 subdivision but only if the home is built first. The DA to council is a joint DA for build and subdivide. The banks look at the whole thing in most cases and if you have sufficient equity to get it off the ground then they will allow a fixed price build contract and pay on progress payments. Very borrower specific of course all the usual servicing rules apply. Agreed - most of ours aren't ppors but you can equally do them with a tenant in the existing home if you pick the right site and do fencing at the right times. Living in whilst completing is another option especially if you want to complete more major renos on the old house whilst completing the subdivision and build at the same time. Warning... don't try it with babies or toddlers as lots of unsafe factors around the home if doing all of that.
Buy High Growth Property WITHOUT Buyers Agents! Buy High Growth Property WITHOUT Dropping $15k On Buyers Agents Each Time! Helping People Achieve PASSIVE INCOME Using Our Unique Data-Driven System, So You Can Confidently Buy Top 5% Growth & Cashflow Property, Anywhere In Australia » Learn HOW Now!