If you own an older home on a good-sized block in Melbourne's east or south east, you may have more options than selling it as it stands. Depending on the site, you could sell with a planning permit, build two homes and sell both, build two and keep one, or hold.
Each path carries a different mix of capital, time and risk. This guide sets out the options, compares them, and works through an illustrative example so you can see where the numbers tend to land.
The short answer
Developing makes most sense when three things line up: the site supports two homes without major constraints, you have the finance capacity and time for a project of around two years, and either you plan to keep one or both homes, or the margin on selling both is strong enough to justify the risk.
Keeping the homes as rentals is a longer-term position that depends on your cash flow and on capital growth. If the fundamentals are missing, selling, or selling with a permit, is often the better decision.
If any of those is missing, selling, or selling with a permit, is often the better decision.
Your options
1. Sell as is
The simplest path. You receive the current market value, usually within a few months, with no development risk. For many owners this is the right outcome, particularly where the site has constraints or the development margin is thin.
2. Sell with a planning permit
You obtain a planning permit for two dwellings, then sell the site with the permit in place. This can widen the pool of buyers to include builders and developers, but the increase in value is not guaranteed. Design, surveys, reports and fees can cost tens of thousands of dollars, and the process often takes six to twelve months.
3. Develop and sell both homes
You build two new homes and sell both. This offers the largest potential profit and the largest exposure. You fund the full construction cost, carry the project for around two years, and take the market risk at the point of sale.
4. Develop and keep one
You build two homes, live in one, and either sell or rent the other.
- Live in one, sell the other. The sale repays most of the project cost, leaving you in a new home with modest debt. For owners who want to stay in the area, this is often the most efficient way into a new home, because it avoids the stamp duty and selling costs of moving.
- Live in one, rent the other. You keep a second property as an investment, but carry most of the project debt, with rent covering only part of the interest.
5. Develop and rent both
You build two homes and hold both as rentals. You avoid selling costs and keep exposure to long-term capital growth, but you carry the full project debt, and rent on new homes typically covers only part of the interest. This is a long-term position that relies on growth and on your capacity to fund the shortfall.
6. Hold as is
You keep the property as your home or as a rental and revisit the decision later. Holding preserves your options, but older rental properties can carry rising costs, including land tax, maintenance and rental compliance requirements.
How the options compare
| Option | Capital needed | Timeframe | Main risk | Suits |
|---|---|---|---|---|
| Sell as is | None | 2–3 months | Leaving value unrealised | Owners wanting certainty |
| Sell with a permit | Design and permit costs | 6–12 months | Uplift may not cover costs | Strong sites, active markets |
| Develop and sell both | Full project cost | 18–24 months | Sale prices, costs, timing | Owners with finance and risk appetite |
| Live in one, sell one | Full project cost, less one sale | 18–24 months | Costs, timing, one sale | Owner-occupiers staying local |
| Live in one, rent one | Full project cost | Long term | Debt and cash flow | Owners wanting a home and an investment |
| Develop and rent both | Full project cost | Long term | Debt, cash flow, interest rates | Long-term investors with strong cash flow |
| Hold as is | Holding costs | Open | Rising costs, market change | Owners not ready to decide |
A worked example
This example is illustrative only. The figures are rounded, are not based on a specific property, are shown before tax, and are not a quote or valuation.
Consider an older house on a 700 m² block in Melbourne's east, zoned General Residential and worth about $1.2 million as it stands. The site suits two side-by-side four-bedroom townhouses of around 260 m² each, built to a high standard, which might sell for about $1.9 million each once complete.
| Item | Amount |
|---|---|
| Site value as it stands | $1,200,000 |
| Site investigations, design consultants and planning permit | $50,000 |
| Pre-construction: working drawings, engineering and building permit | $40,000 |
| Authority fees, development contributions and service connections | $30,000 |
| Demolition | $25,000 |
| Construction, including site works (incl. GST) | $1,850,000 |
| Subdivision: fees, land surveying and legals | $20,000 |
| Finance and holding costs | $150,000 |
| Contingency (5% of construction) | $92,500 |
| Selling costs, both homes | $85,000 |
| Total, including site value | $3,542,500 |
| Sale of both homes | $3,800,000 |
| Margin before tax | $257,500 |
What the numbers show
The land is counted at its current value because that is money you could have by selling today. The development has to earn more than that to be worthwhile.
On these figures, developing and selling both homes produces a margin of about $257,500, or roughly 7% on total cost. That return comes after around two years, about $2.3 million of costs to fund beyond the land, and exposure to the market at the point of sale.
The margin is also sensitive. If the homes sell for 5% less, about $1.8 million each, the margin falls to around $70,000. If they sell for 5% more, it rises to around $445,000. Movements in construction cost or timing have a similar effect.
For many owners, a margin of this size does not justify the risk, and selling the site is the sounder choice. That is a legitimate outcome of a feasibility review. The picture is different if you keep one of the homes.
If you live in one and sell the other
For an owner who wants to stay in the area, the comparison is not with selling the site. It is with selling the old house and buying a comparable new home.
Selling the existing house for $1.2 million and buying a new home for $1.9 million would require around $840,000 in additional cash, once stamp duty of about $105,000 and selling costs are included.
Developing and keeping one home, on the same figures, would require around $400,000 in additional cash after the sale of the second home. Even after allowing about $60,000 to rent elsewhere during construction, the owner ends up in a comparable new home and is roughly $380,000 better off than buying. Peak borrowing during construction is still substantial, so finance capacity remains essential.
This is why owner-occupiers who keep one home are often best placed to benefit from developing.
If you hold the homes as rentals
Holding changes the question from profit to cash flow. On the same figures, and assuming the land is owned outright, the project leaves about $2.26 million of debt once complete. The table below assumes each home rents for about $1,200 a week, outgoings of around 20% of rent, and an interest rate of 6.5%.
| Item | Rent both | Live in one, rent one |
|---|---|---|
| Debt on completion | $2,257,500 | $2,257,500 |
| Annual interest | $147,000 | $147,000 |
| Rent after outgoings | $100,000 | $50,000 |
| Annual shortfall before tax | $47,000 | $97,000 |
In this example the gross rental yield is about 3.3%, below the interest rate, so the homes cost money to hold each year.
On paper, holding both homes builds equity of about $340,000 above the site's current value: the development margin plus the selling costs avoided. That equity is only realised on sale, and depends on values holding up.
For an owner who lives in one, keeping the second home rather than selling it means carrying around $1.9 million more debt, at a net cost of about $70,000 a year before tax, in exchange for owning a second property worth about $1.9 million.
Holding can suit owners with strong income who want long-term exposure to land in a good location, or who would rather wait out a soft market than sell into it. It does not suit owners who would be stretched if interest rates rose or a home sat vacant. How interest and holding costs are treated for tax depends on your circumstances, so get advice from your accountant.
Every site is different. If you would like to see how the numbers might look for your property, a short call is the easiest place to start.
What should decide it for you
- The site. Zoning, overlays, frontage, slope, trees, easements and services determine what can be built. A site that looks suitable can be ruled out by a single constraint.
- Finance capacity. You will need equity or construction finance for the full project cost. Speak with your lender or broker early.
- Time and involvement. Allow 18 to 24 months from feasibility to handover.
- Appetite for risk. Costs, approvals and sale values can all move during a project.
- Your plans for the homes. Keeping one changes the economics, as the example shows.
- Tax. A development can be taxed very differently from a sale, including capital gains tax, GST and whether profits are treated as income. Get advice from your accountant before you commit.
When selling is the better choice
Selling is often the better outcome when:
- the site has constraints that reduce yield or increase cost, such as a narrow frontage, significant trees, easements or a steep slope
- the margin on selling both homes is thin and you do not intend to keep one
- you do not have the finance capacity, or would be stretched if the project ran over time
- you need the funds within a set timeframe
- a project of around two years does not suit your circumstances
An honest assessment should tell you when not to develop. We would rather you sell with confidence than start a project that does not stack up.
Questions owners often ask
Does a planning permit add value to my property?
It can, but not automatically. A permit removes some uncertainty for buyers, which may lift the price on a strong site. On a constrained site, or in a soft market, the uplift may not cover the cost and time of obtaining it.
How much do I need to fund to develop?
Broadly, the full cost of design, approvals, construction and holding, excluding the land you already own. In the example above, that is around $1.8 million. Most owners fund this through a combination of equity and construction finance.
Can I develop if I still have a mortgage?
Often, yes, but your lender will assess the project as a whole, including the existing debt, the construction contract and valuations. Speak with your lender or broker before committing to design.
How long does a development take?
Typically 18 to 24 months from feasibility to handover. Our development process guide explains each stage.
Will I pay tax on the profit?
Possibly. The treatment depends on your circumstances and intentions, and capital gains tax, GST and income tax can all apply. Seek advice from your accountant before deciding.
Where to start
The right decision depends on the site, your finances and your plans for the property. A 30-minute call is usually enough to tell whether the site is worth assessing further.
If the site looks promising, a feasibility assessment then tests the planning controls, layout, costs and likely end values in detail.
Not ready to talk yet? Download our free feasibility guide, which covers site suitability, costs and returns, planning risks, and when to sell instead.
