It makes sense to maximise the returns on an investment property, and a range of development options could let you do just that.
Building a granny flat
A granny flat has the potential to turn spare land into a gold mine. In fact, the humble granny flat has come a long way – a quick Google search shows that granny flats can command rent of around $300 a week. On a building that can cost over around $120,000 to get up and running, that equates to a gross (before costs) rental yield of 13%. Put differently, your granny flat could potentially pay for itself in just seven years.
However, while the prospect of turning spare land into a money spinner can be appealing, it pays to do your homework.
The rules vary between suburbs, but in many cases the owner of the granny flat must also own of the main dwelling. Granny flats can’t normally be built on their own sub-divided block.
This is important because the two homes – the granny flat and the main dwelling, may need to co-exist on a single title. The impact for investors is that without separate title, a granny flat can’t usually be sold separately. This makes it worth thinking about how a granny flat could impact the market value of your property. However, to decide whether it’s a good investment opportunity for you, it is critical you research your options and learn about the risks of adding a granny flat before making the final decision.
Zoning sets out the way that a block of land can be used, and the type of council approval needed to complete any development. When it comes to granny flats for instance, a number of states including NSW and WA have altered planning regulations in recent years so that it’s generally a lot easier for people to add a granny flat to a property zoned as ‘residential’ land.
Zoning can be complex, and if you’re planning to build or redevelop a block, be sure the land is suitably zoned for your proposed dwellings.
The DA process
Any major development is likely to require a development application (‘DA’). Each council can have slightly different requirements but in general, lodging a DA is a staged process.
The first step is to do some homework to know what is allowed on your property and any potential constraints. Have plans drawn up for the development, and talk with neighbours to explain your proposal. Then lodge your DA with the council along with any certificates or other paperwork that may be needed.
Along with the cost of preparing the DA, you should budget for the fee to lodge your DA with council. The cost can be based on the value of your project, so the bigger the development, the more you pay.
Getting the council’s tick of approval for any sort of development is a must-do, and a phone call to the council should shed light on the rules that apply to your development.
If you have a large chunk of land, one way to make money as an investor can be to sub-divide the block.
Subdividing can take many forms. You may choose to divide a single block into several lots, rearrange the boundaries of a block, or create an easement to give a block road access.
While the main hurdle you may face is securing council approval for the proposed subdivision, you may also need to consider the market appeal of the blocks or development you are thinking of, and whether the likely sale price outweighs the cost of the project.
Understanding GST in property development
If you’re buying land with the idea of subdividing it for sale, you may need to register for goods and service tax (GST). That’s because as far as the Tax Office is concerned, the transaction starts to look like a money-making business.
The benefit of registering for GST is that you can claim credits for the GST included in any expenses related to the purchase of the land. On the flipside, you’ll need to include GST in the sale price of the land once you’ve subdivided.
If you're not sure whether your subdivision is a profit-making venture, talk to your tax professional or get in touch with the Tax Office to know exactly where you stand.
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- Chapter One : Things to consider before investing in property
- Chapter Two : Determining where to invest
- Chapter Three : Investment properties by dwelling types
- Chapter Four : Finance for your investment property purchase
- Chapter Five : How to invest in property
- Chapter Six : Adding value to your investment property
- Chapter Seven : Positive and negative gearing
- Chapter Eight : Getting your loan
- Chapter Nine : Selling your investment property