Micro development is a powerful strategy for building a high-cash-flow and high-equity portfolio. Here is the lowdown on what exactly it is and why it is so powerful. When deciding to start buying investment properties, most people tend to buy either a house or an apartment, renovate it to smarten it up for a tenant and then wait for its value to grow organically.
There are two main problems with this strategy…
It almost always starts negatively geared, so it eats a hole in your pocket. You are wholly dependent on the market to get any bang for your investment buck (and that can be slow).
Enter micro development, where you get an instant increase in value. And you also end up with a positively geared investment property that puts money in your pocket from day one. Micro development is a term coined by Sydney Town Planner, Colin Fragar. It involves six key steps:
- Buy a house on a block of land that is large enough to subdivide
- Subdivide (this may happen before or after the new build)
- Build one or two properties on the subdivided land to hold
- Renovate the existing house
- Sell off the existing house and put the proceeds back into the deal
- Have the new properties revalued and extract your initial investment to go again
There are several important distinctions you should be aware of:
- Sometimes the project needs to be done in stages to navigate the council approval process.
- It’s called ‘micro’ because it involves domestic builders and residential borrowing (not commercial).
- Profit margins can be 30% – 40%.
- It is best to sell off the renovated house to reduce the debt on the new properties
- Ideally, you should be able to refinance the new properties once complete, recover your initial investment and still have around 20- 30% equity in the properties
- You MUST engage the services of a town planner in the due diligence phase of your property purchase to identify a suitable site.
- The strategy can be combined with other strategies…
One of our women has combined the micro development strategy with her PPOR in the Hunter Valley. She bought a house on a large corner block that she can subdivide and build one, possibly two, investment properties on. Another has combined the strategy with Airbnb in Kyneton, Victoria. Instead of selling the existing home, she is producing a higher cash flow on Airbnb and building a new house on the same block. Stephen and I have combined micro development with the ‘avocado smash’ strategy with our third daughter and her husband in Echuca, Victoria.
Of course, all the usual rules apply to micro development as to any other investment strategy. In particular, you need to buy in an area with diverse employment options.