From Andrew: Why I don’t subdivide

Should you subdivide properties as part of your investment strategy? Property owners with large backyards often see it as a fast, easy way to make money. 

I’ve tried (almost) every property investment strategy in the book and today I own over 40 investment properties... but personally, I don’t use the subdivision strategy. 

In my experience you don’t make as much money as you think you will.

That’s not to say: “Subdividing doesn’t work at all.”

But after 20 years of investing, every time I’ve bought land to subdivide, it’s rarely worked out as planned.

Here’s why … and the times subdividing can still work:

More from Opes Partners:

• Subdividing Your Property: Pros and Cons Explained (Article)
• Subdivision secrets: How much can you make? (Podcast)
• Do properties with more land go up in value faster? (Article)
• New build vs existing - Which goes up in value faster? (Article)

3 reasons why I don’t subdivide properties

Here are the 3 main reasons I don’t use the subdivision strategy.

#1 It doesn’t make as much money as everyone thinks

Subdividing is when you divide one piece of land into multiple sections. Each becomes its own address (title), so it is legally its own piece of land.

Here’s what typically happens, in my mind. 

Jack buys a property, holds it for 10 years, and then carves off a section at the back. 

He spends $50k on the subdivision and sells the section for $200k. On paper, that looks like a great win.

But here’s what Jack usually forgets:

1. Natural capital growth: That land would have appreciated in value without the subdivision. Some of that $200k in value came from the property going up in value.
2. The true costs involved: Subdividing isn’t cheap – you’ve got legal fees, council costs, holding costs, and more.
3. Reduced property value: A house on a smaller section typically sells for less than one on a full-sized section. So when you subdivide, your original house goes down in value.

When you crunch the numbers, the profit might not be as impressive as you thought.

#2 – Subdividing drops the value of the original property

You’ve got a million-dollar house in Auckland. It’s got a big backyard, and you’re thinking about subdividing it.

Here’s how it might play out:

• It costs you $100k to subdivide, and the process takes a year.
• You sell the new section for $300k.

Sounds great, right? 

But now your original property has also dropped in value. That million-dollar home might now be worth $800k or $900k at best. 

So how much money did you make?

Your property was worth $1 million at the start, and it cost you $100k to subdivide. 

In the end, your 2 properties are worth $1.2 million. That’s $900k for the original house + $300k for the new section. 

After all the effort, you’ve made $100k, and that’s before factoring in the stress and any real estate agent costs.

#3 – Subdividing is expensive

Subdividing can have hidden costs. 

Banks are cautious when it comes to land. So, if you want to buy a piece of bare land and carve it up, you’ll need a 50% deposit. 

Compare that to a 30% deposit to buy an existing investment property or 20% for a New Build.

Some people also think: “I’ll buy a house, subdivide the land, then it’ll be worth more. So I will borrow more money against that more valuable land.”

But the numbers don’t always work out like that. 

Again, if you subdivide a $1 million house and section, you need a 30% deposit – $300k.

And you’ll need at least $300k worth of equity in the house before you can borrow more money against it.

But after the subdivision, you now own 2 assets. A house worth $800k and a piece of land worth $300k.  

You then need a 30% deposit in the house ($240k) and a 50% deposit in the land ($150k). 

You won’t have to immediately pay down the mortgage, but you now need $390k worth of equity before the bank will lend you more money. 

If you’re not following these numbers, that’s OK. My point is that the numbers are complex and people overestimate what they’ll come away with. 

When can subdividing work? 

I don’t want to scare you completely off subdividing because there are times when it can pay off. 

Here are 3 of them:

#1 – Development Projects

If you’re buying a large parcel of land and want to build multiple townhouses, that’s a different game. 

You’re creating a new product – finished homes with their own sections. That’s a proper development project, not just slicing off a part of your backyard.

So, I will still subdivide properties if I develop properties on them. That’s a different strategy.  

#2 – Rezoned land

Sometimes, land can be rezoned from rural to residential, dramatically increasing its value.

I'm looking at a piece of land at the moment for $800k in Canterbury. Right now, it’s zoned rural, but it’s on the cusp of being rezoned to residential. 

Now, if the zoning changes, that’s a lucrative subdivision. But if that doesn’t happen, it will just be a piece of dirt that I end up making nothing from.

So it’s a high risk, high return, but I’ve built enough wealth that I can take that risk. Most people can’t. 

#3 – If you buy the land without a mortgage

I have a friend who’s successfully subdividing land on the outskirts of Christchurch. 

But here’s the thing – they bought the land outright. There’s no income coming from it during the process. So, they don’t want to carry any debt.

Personally, I don’t do this. It’s a lot of money to lock up in a single piece of land. But, if you’ve got the money to buy a piece of land outright, the subdivision strategy will work for some people.

Why I don’t use the subdividing strategy

When I weigh it all up … I’ve decided that the subdivision strategy isn’t for me. 

And I don’t think it’s right for most property investors, especially for people who are at the start of their property investment journey.

There are too many factors people don’t consider. 

Subdividing often seems like an easy way to make money, but it’s rarely the silver bullet it’s made out to be. 

Too many jump in without fully understanding the costs, risks, and impact on the house they’re left with. 

Sure, there are instances where it works. For example, if you are doing a large-scale development or rezoning land. But for most property investors, a buy-and-hold strategy feels like a more predictable way to build wealth.