One of the most effective forms of investment in real estate at auction is called restructuring plus subdivision as it gathers commercial, economic and financial advantages. In fact it is a kind of “outlet” purchase with the possibility of resale on the open market with higher profit margins, an operation made even more advantageous by combining it with renovation: the costs of separation are minimal if carried out while the property is being renovated.
In addition, they are often bought at a bargain price because they are properties that are too large for a family and therefore not in high demand on the market.
Of course, for everything to work, you have to first place choose the property to be divided carefully, because not everyone is fit for purpose. Here are the features it should have:
- Large dimensions, at least 120 active square meters.
- Being an apartment rather than a house because the cost of the area and any external insulation have too much of an impact on the latter.
- Square plan because it is easier to divide: at the entrance it will be possible to create a compass with new doors, one for each new unit. Will it also be possible to open a new door to the landing, provided this does not infringe on the vested rights of third parties, for example will it not be possible to open a door that prohibits passage into condominiums or spaces already used for pram storage?
- Good orientation, because new units cannot have total exposure to the north.
- Central heating so you don’t have to install a very expensive new system but at most move a few radiators.
- Low floor so condominium expenses for elevator, cleaning… are lower than higher programs and lower expenses equal higher cash flow:
- Make sure that the Municipality where the property is located allows the apartment to have a single bathroom, as this would be the easiest solution to implement in the split. In most municipalities the window is mandatory.
- The property needs to be renovated because there will be fewer competitors at the auction, and this for three reasons: people generally don’t have the desire or time to carry out work; does not understand, the experts mentioning in the assessment the real condition of the property and emphasizing the need for its renovation, prohibit participation in the auction to those who do not have the availability of additional financial resources for the purchase that will be devoted, at a later time, to the renovation.
In summary, the technique of restructuring and subdividing a property can offer several advantages to the investor, such as:
- Increase property value: Renovating a property and dividing it into smaller residential units can increase its overall market value.
- Greater income: dividing the property into smaller units can allow the investor to obtain more income from multiple rentals compared to the situation in which the property remained a single unit.
- Diversification of risk: dividing a property into smaller units can allow you to diversify the risk of the investment, as the reliance on one tenant is reduced.
- Cost reduction: Renovation can lead to a reduction in maintenance costs, as well as a reduction in energy costs, as the property will be more energy efficient.
- Increased liquidity: Dividing the property into smaller units can allow parts of the property to be sold easily and quickly if liquidity is required.
- Greater investment opportunities: renovating and subdividing a property can open up new investment opportunities, for example, buying a whole building and then selling it in separate parts.
In short, it is essential to look for properties at auctions that few include on their shopping list, so that they have a better chance of obtaining a very favorable price per square meter. The increase in value results partly from restructuring, but mainly from subdivision.
During the open market resale phase, condos will be offered to the market that have a much larger pool of buyers than the original properties, as the units obtained from the subdivision are smaller and cost less, even if renovated with full certifications.
But beware, this In this market period it is more important than ever to do good accounts. It is necessary to start from the assumption that it is not possible to sell the apartments, so it is necessary to ensure that the rents of the apartments acquired cover each installment of the mortgage loan taken for the purchase. This is possible because, thanks to the split, you will end up with more tenants instead of one, with two advantages: a lower risk of arrears and a higher amount of rent compared to the single rent that would have resulted from the undivided apartment.
To give an example, if in a certain area there are two-room apartments rent for €600 per month the rent is possible of a double apartment in the same area is not double but only €800 per month. Therefore, splitting the property costs a bit more than simply renovating it, but the cash flow gained more than justifies the expense.
Ultimately, the split, as an auction real estate investment strategy, is almost always profitable in terms of both capital gain, cash flow and diversification risk but above all, in a difficult time like today, it is important that the novice real estate investor is supported by serious and competent advisors.