This article was first published in Australian Property Investor magazine and is copyright and reproduced with their permission.

While some may still be pining for those good old boom days, others have come to terms with the fact that a fairly flat property market lies ahead, for a while at least.
These astute investors are starting a new trend for the new times and, as Matthew Page, valuer with Knight Frank Tasmania succinctly puts it; "It's all about value adding now."

The right time to subdivide
So do you rest on your laurels and await the next value rebound, relying on the nature of cyclical trends and the fact that they will predictably take us back to more lucrative, asset appreciating times?

Rod McShane, founder and director of Australian Private Realty contends that this run-of-the-mill investment method has had its day and the future of wealth creation lies in expansion and development.

"With greater interest and media focus on real estate, recent years have seen an increase in demand to get into the market. This demand has had some positive influence on the market place, which has now flattened out in many regions. Rather than purchasing more to increase a property portfolio, the average investor might well look into their existing real estate to see if there may be opportunities to subdivide."

All around the country, State Governments have been developing blueprints for future urban direction within their capital cities, suburbs and country towns. These are based on population projections which not only show general growth within the country over time, but also a vast increase in aged and single person household demographic clusters.

Harley Dale, senior research analyst with the Housing Industry Association predicts this is going to be an increasingly obvious trend and hence feels property development is, "a topical thing to be looking at, in the sense that you would expect subdivisions are going to become more prevalent in the future and it's an aspect of housing that's going to increase over time."

Dale says; "The two primary reasons for that are what's going on with growth boundaries in cities and density requirements for housing. Sydney's the best example of that, where you have significant land constraints, which in turn will channel more people down the route of subdividing in terms of property investment."

Secondly, Dale says, "We're probably going to see this as a more viable investment option, simply because there's been a massive increase in the price of land in recent times. This has been particularly occurring on the fringes of capital cities. This trend could direct people's thinking more towards subdivision of an existing part of a portfolio they already own, rather than looking to develop a new block."

Dale also points out that currently, "Housing markets are pretty tight and rental markets are quite firm. Hence, you have a situation where underlying demand for housing is strong, but you're facing certain constraints such as land supply and the inflated price of land.

"People looking to invest in property are going to see an incentive there to supply the market, but within constraints that might promote more subdividing than we've seen in previous cycles."

What is subdivision?
Subdivision necessitates active involvement from the investor, unlike passive ventures where you purchase a property and rely on long-term capital gains. It's an endeavour that requires hard work and should not be entered into lightly.

Subdivision can involve purchasing a raw parcel of land to create a small to large housing estate or building on an existing property with a second dwelling, such as duplex or dual occupancy sites.

It can also encompass purchasing an existing apartment block to separate or strata the title, so that instead of one product, you have the bonus of selling single units within the complex.

Subdivision may involve creating an entire new block of townhouses or units for the medium-density market on an acreage allotment in an area where a council encourages this activity.

Property investor and author Steve McKnight describes a recent deal he was involved in to illustrate how rewarding and simple subdivision can be; "We bought eight previously strata-titled dwellings as an entire package deal and we're just going to sell them off individually.

"We haven't had to do any of the development work, it's all been done for us. But we had the advantage to buy wholesale in terms of purchasing all eight units and then selling retail, by selling them off one at a time."

Peter Comben walks us through an alternative scenario.

"Another option is to develop commercial land with something like storage units, which are very cheap to construct and provide good cash-flow returns. Most commercial developments, if you retain the property, will provide at least a thirty plus per cent return."

Building a successful subdivision portfolio
Many experts believe that you can combine subdivision and being an active participant in literally building your property portfolio, with passive investment. So where do you start with this approach to wealth creation?

McShane suggests, "The most viable subdivision for the average investor to start with would be a small one. The smaller the subdivision, generally the less risk. A house on a large block suitable for two dwellings may be the ideal first time subdivision.

"Consideration then has to be given as to whether you're building a second dwelling to keep the property long term or to sell it off and place the money back into debt reduction of an existing mortgage."

Setting up a scenario whereby developing a property can create positive cash flow that will assist in reducing debt on any existing loans and even purchasing further property to retain in your portfolio, is highly recommended by those who know best.

Martin Ayles, an Adelaide local, discovered property development initially by accident. He had been buying and renovating property as investments for a number of years, before an opportunity arose for him to subdivide an allotment with an existing house.

After his initial project paid off, he realised the potential he'd been missing out on and has been hooked ever since.

Ayles advises first timers try, "Smaller residential subdivisions. Perhaps starting out with a duplex or an allotment where you can split one into two."

He adds, "Subdivision is an extremely powerful method of dividing to multiply your profits, however if you sell everything – money's easily spent. I recommend a ratio of about five to one, so for every five that you build, retain a minimum of one.

"I'd also suggest trying to get the properties generating cash flow rather than having them negatively geared. For instance, if you build five properties, let's say you sell four and keep one, then you would pay all your profits into that last one to reduce your debt down so that the weekly rent could more than cover the mortgage."

Ayles believes using your smarts with potential profits will determine your long-term ability to cash in on this method of property investment.

He reiterates, "The critical part is what you do with the money that you make from the development because it's one off and not passive, so you've got to then take that money and reinvest it into something that's going to create a passive income for you, be it a retained property, shares, paying off some of your portfolio to reduce debt, etc."

McKnight agrees with Ayles contention that creating and generating positive cash flow through property development is a favorable approach over managing a negatively-geared portfolio.

"Develop and sell some to bank the profit, pay off debt and hold a large number of positive cash flow properties in your portfolio. Over say, a 10-year period, you might end up with 10 or 15 positive cash flow houses which could provide a significant income."

The process to maximise profits
It's crucial that anyone considering tackling property development, whether on a large or small scale, has done their homework, mapped out the process from start to finish and accounted for any contingencies.

Comben recommends, "Have good due diligence methods to prove that what you're proposing is going to work. If it's a subdivision, it's all about coming up with the right concept, meaning you have to work out something that fits with the planning codes and applies to the land. You also have to make sure that you're actually going to make a profit."

Tim Kelly of Rigby Cooke Lawyers says, "The first thing an investor should do is have a look at the title and talk to a lawyer and at this stage, don't sign anything until they've spoken to a surveyor. They're the ones who'll prepare the plans and perhaps let them know whether they think they'll get the surveyed plans through. So find an experienced and local surveyor, who knows the area, council, etc – he or she can be of invaluable assistance to the investor at the beginning."

McShane is on a similar track when it comes to beginning any development journey. "Contracting a builder and or solicitor with experience in subdividing is a huge advantage to step you through the initial stages."

He continues, "The first step is finding out whether subdividing is feasible. In most cases the local council concerned can provide you with the information that you need. They can advise you of special conditions required to be in place, issues such as zoning and in the case of building a dwelling to subdivide off, they can advise of plot ratios, including minimum space requirement for each dwelling."

Once you have this information then you'll need to establish cost estimates so that you can calculate possible risks and rewards.

McShane says, "If you're subdividing off land, the council may be a good place to ask for help. Most councils have guideline procedures in place for subdividing so they can be a great source of information for the first timer. They're also not commercially driven, so they're more unbiased and will just give you the procedures and costs."

Queensland developer John Dudley has had great success with raw land subdivision and housing estate construction. He believes that the secret to success is teamwork.

"With the assistance of a professional team, anybody can subdivide. The key person to lead the team is usually a surveyor, who will probably be able to recommend a good engineer and town planner.

"If he recommends them, it's likely they will have worked well together in the past and you could also inspect some finished jobs. The surveyor's probably capable of coordinating the project if the developer is reasonably inexperienced. The other three necessities are a competent solicitor, a source of finance later in the process and an effective marketing team with extensive house/land package experience. The ability to sell the end product in varying market conditions is paramount."

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