By Victor Kumar
To become a competent property developer you must take your time and work your way up to bigger projects.
After completing a few cosmetic renovations, the next step is a simple subdivision, which I outlined in the first part of this special series.
The next step to successful property development is a strata subdivision.
And the ideal one to begin with is a small block of units that are on one title.
Working with council
First of all you need to research the local council to ensure that they’re not going to be throwing up hurdle after hurdle in front of you.
One of my first strata subdivisions was a block of eight units in Punchbowl in New South Wales.
The problem was the person I had to deal with at council didn’t understand that there shouldn’t have been a construction certificate issued, and kept asking for a builder’s contract, even though these units were already established.
The project was just a simple DA, then you follow a standard process and submit everything to council.
I argued with that person for about two months and got nowhere.
Then, thankfully, he went on leave and someone else stepped in and automatically understood that I didn’t need a construction certificate because I wasn’t actually building anything.
A strata subdivision is when the property is already existing so all you’re doing is making it compliant to the current building standards, such as fire ratings, etc and separating the units into their own titles.
I’m not sure what would have happened if that first person hadn’t gone on leave. I might still be arguing with him today.
You must also consider if you need additional parking under the current rules and regulations.
Sometimes, to circumvent the requirement, you might have to do a SEP 10 subdivision or equivalent.
If you pledge a third of the units into the low rental pool – so you’re charging less rent for a period of time – the council may be a lot more lenient.
Of course, it’s vital that you have these conversations ahead of time, which is why most developers have a due diligence clause.
The reality is that when you’re buying a small complex, it’s not a mum and dad purchase.
What you’re doing is you’re playing in a niche market where it’s too big for the novice investor, but it’s too small for the big players.
It can be a lucrative niche market, but you need to have your due diligence done ahead of time, including understanding council appetite, the relevant processes, and whether you’ll need to upgrade the property to current standards such as fire ratings and balconies.
You must understand whether the building itself will be easily compliant or will it cost an arm and a leg to upgrade to meet current specs.
Plus, you also need to look at the separation between the units for fire-rating purposes.
Often people forget that a fire-rated wall needs to go all the way to the ground and all the way to the roof tiles and beyond so it’s a complete separation.
That’s where most of the major cost of a strata subdivision lies.
You need to evaluate all of these things before you actually start the negotiation phase of the property.
It’s vital to understand that anything you’re creating a new title on comes under the current rules.
In the past you didn’t need to upgrade to the current fire rating, for example, but now you do, which is an additional cost.
Many people think a strata subdivision will cost about $20,000 but those funds will be easily eaten up by surveys, plans, council application and land title fees.
Making the building compliant to current regulations can also be a significant additional expense.
Most people don’t understand the total costs before they begin a strata subdivision so their feasibility analysis is way off to begin with.
The other issue is that the pool of buyers for the property if you’re unable to strata it is limited.
A strategy to reduce that risk is that you must buy the property at a price that even if you do spend, say $20,000 on it during the failed subdivision process you’re able to offload it and walk away with your money intact.
All you’ve lost is time as well as probably learned some valuable lessons, too.
Another element that you must consider is the length of time that it takes to complete a strata subdivision.
Far too many people think it is a quick process, when it’s not.
In fact, the average strata subdivision timeframe can be between one to two years.
It depends on the council, how many hoops you have to jump through, and how many experts you need to lean on during the process.
As an example, we had a block of three townhouses that we bought from the Department of Housing where we had to fire-rate the walls, which were gyprock so it was a more complex process.
We installed the fire rated-walls but then we used a private certifier to get it over the line.
So another tip is to find councils that allow you to use private certifiers because they will work out ways to make it work.
Whereas council will simply ask you to submit the application and then rule one way or the other – which can waste even more valuable time.
A strategy to reduce the project timeframe and hopefully the number of hurdles is to delay settlement on the property.
You should try to secure a three- to six-month delayed settlement, which will allow you to get more of the works done beforehand.
Obviously you can’t submit the DA until it’s in your name, but if you can get most of the prelim works done beforehand, you can hit the ground running.
I actually get consent from the owner to submit the DA – council will not stamp it until it’s under my name – but at least council can start assessing it sooner rather than later.
There is no such thing as an ideal strata subdivision because every single one is mainly about problem solving.
I like to equate it to peeling an onion.
You have to peel the layers to get to the middle, which is where the opportunity lies, but before that it it’s shrouded in problems (and lots of tears!)
You must solve the problems to get to the opportunity.
A number of strata subdivisions that I have bought, I’ve bought off people who had bitten off more than they could chew or didn’t know how to problem solve.
A good example was a block of six townhouses, where the developer went broke.
There was a number of potential buyers, including institutional buyers, but I was successful.
It had a number of problems, including waterproofing certificates, but I just solved each one as we went along to produce a successful result.
So, with all property developments, it’s about thinking outside of the square and solving problems as they arise.
You must always keep your ego and your temper in check, especially when you’re dealing with council.
That’s because if you rub them the wrong way, you’re not going to have a good experience.
Sometimes you have to swallow your pride, let them have their power play, perhaps play the old “Help me, please” card and then you’ll likely get your way.
If you missed the first part of this special series click here to read all about simple subdivisions.