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Case study: Insider knowledge pays off in this retain and subdivide strategy

Thursday, 30th Jan 2020

When an experienced investor approached us in 2017 after finding he was unable to leverage equity from his portfolio to upgrade his home, we worked with him to develop a value-add strategy that would get him to his final goal.

Check out the case study below to find out how we exceeded the brief to help the investor achieve this result, while adding a high-performing investment property to his portfolio in the process.

The problem

homeupgrade

The client first approached Momentum Wealth in 2017 with the specific goal of upgrading his owner-occupier property to move into a more desirable suburb with his growing family. Having recognised property as a vehicle he wanted to use to grow his wealth early on in his investment journey, the client already owned a number of existing assets spanning across several States in Australia, including Queensland, Western Australia and New South Wales.

While the investor had enjoyed early success in property investment through an initial subdivision, many of his most recent purchases were cash-flow focused and had been accumulated over a short time period with a previous agent, resulting in relatively little growth to his portfolio. As a result, when the investor had sought finance for his owner-occupier purchase, he was unable to leverage the equity he needed to fund the move. At the same time, having worked so hard to accumulate his portfolio, the client was reluctant to sell off any of his existing properties.

Developing a strategy

Given that selling the existing properties was not a viable option for the investor, our finance broker and buyer’s agent knew the client required a strategy that was going to accelerate his equity position within a relatively short time-frame. Based on these factors, we advised targeting an active add-value property, which would allow the investor to manufacture the equity he needed for his next purchase.

Specifically, we were looking for a retain and subdivide property in an area with strong demand and lifestyle attributes that would support longer-term resale. Given the investor’s end goal, it was also extremely important that the property was secured at the right price point to ensure the project would generate sufficient equity to execute his trade-up strategy.

Property acquisition

The property which our buyer’s agent identified was a corner block property situated on a 700 sqm site zoned R-20. Located in Beldon, the site offered strong long-term growth prospects, including proximity to the coast and Joondalup’s CBD, and was situated in a predominantly low-density residential area with limited land available for future development, which removed the threat of competing stock for the property’s future re-sale.

The rectangular formation of the lots was also ideal for the retain and subdivide strategy, as this would allow the investor to subdivide without any modifications to the existing dwelling (even maintaining the property’s original patio). While minimising the potential costs involved in the project, both lots also offered a good frontage with the corner block site allowing for separate entrances, adding further desirability for future buyers and renters.

The kicker – Ordinarily, sites zoned R-20 would legally require a minimum of 450 sqm per block (900 sqm in total) to complete a subdivision. However, our buyer’s agent was aware of a policy that allowed for a minimum of 350 sqm per block on corner block sites – something which many buyers are not familiar with, and in this case, was not known to the selling agent. With a finance approval already in place through our finance brokers, we were able to mobilise on this opportunity quickly, which resulted in the property being secured well below market value at $410,000.

Subdivision and leasing

Through a smooth on-boarding process with our property management team, the investor was able to retain the existing tenancy throughout the settlement and subdivision approval process. This generated an additional $17,900 in rental income during the approval period, significantly reducing the client’s holding costs.

Once ready to proceed, the applications for subdivision were submitted and approved, with the project coming to a close within 20 months. The investor also used this time to carry out renovations on the existing dwelling, which he originally intended to sell once the subdivision was complete.

Finance

The investor’s finance strategy remained paramount throughout this entire process, with an impending temporary transition to single income being a primary concern. By refinancing the client’s loans in advance of these changes, we were able to extend his interest-only periods before the move to single income took place, also saving money on repayments to improve his equity position in the process.

Final outcome

Once the subdivision was completed, Momentum Wealth’s buyer’s agent re-appraised the rear lot ready for sale. Through accurate pricing, we were able to achieve an extremely efficient transaction, resulting in the lot being sold within three weeks of advertising for a total of $272,000.

The front property was also re-valued following the renovations, with the bank valuation coming in above initial projections at $385,000. Together with the sale of the rear lot, this generated an additional $120,000 in equity pre-tax (factoring in all acquisition, renovation, subdivision and selling costs) which the investor could now use to complete his owner-occupier purchase.

Not only this, but due to the excellent results achieved, the investor was able to retain the original dwelling from his subdivision as an investment property. This property was re-leased by our property managers at $375 per week (originally $310), marking a 21% uplift in rental income, and an 11.3% return on investment from the renovations on the property.

Project highlights:

  • Leveraged detailed knowledge of corner block policy to secure site in established suburb below market value.
  • Existing tenancy retained for over a year, generating $17,900 in additional rental income during subdivision approval process.
  • Subdivision completed under budget with minimal modifications to existing property due to favourable lot formation.
  • Additional $120,000 equity realised through sale of rear lot and high valuation on original dwelling, providing required equity for client’s owner-occupier purchase.
  • 21% uplift in rent achieved on original property, generating a 11.3% return on investment from the property renovations.
  • Clients able to upgrade into desired suburb while also retaining a high-yielding investment with strong growth potential.