Steven Gillman

Subdividing Land For A Profit

Why try subdividing? Because land gets more valuable as you split it up, making this a potentially great real estate investing strategy.

Subdividing land and selling the lots is less complicated than developing and building, with a little less uncertainty. The drawbacks? It ties up your money for a while and since this is non-income producing property, holding costs can eat up profits if the lots don't sell as fast as you planned.

A friend of mine developed a small subdivision. He started by buying a home on 65 acres. After getting the land surveyed, he was able to sell the house with just an acre for almost what he paid for the whole property. He split the rest up into large lots of an acre or two, and started selling those, It took a couple years to sell them all, but the profit was certainly worth it.

This is a relatively safe investment, if you do your homework. You will have the cost of a survey, "perk tests" if there will be septic systems, and other relatively minor expenses. You'll have to get new tax numbers assigned to the parcels. You may have higher property taxes in total from that point on, because the sum of the value of all your lots will be more than what the property was worth whole (at least you hope so).

If you buy land that fronts existing roads, you may be able to avoid the cost of putting a road in. Otherwise you'll need to figure in that cost, and the legal costs of having conditions and covenants or other agreements and subdivision plats drawn up.

Most of these costs can be estimated with some certainty before you begin. Then, once the land is split, your primary expense will be property taxes, at least if you are doing this whole deal with cash. Otherwise you will have interest charges as well (unless you financed the deal).

The first piece of property I ever bought was from an old couple who bought a piece of land and created a subdivision to fund their retirement. I believe they had at least 100 lots. About 13 were left when I bought mine for $3,000 (I sold it a few months later for $4,000).

They had apparently invested cash to do the project, and so were able to sell the lots on payments. This meant a higher price and 11% interest. My lot required just $100 down payment and $100 per month. They sold out the last of them shortly after I bought mine. Subdividing worked for them.

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