Subdividing existing housing units into smaller self-contained rental units has become an increasingly important approach to expanding affordable housing supply. Yet while subdivision increases the supply of low-cost housing, it may also generate congestion, safety, and other residential externalities. This paper studies this affordability–externality tradeoff using the expansion of a large PropTech platform in Beijing that converts apartment living rooms into additional bedrooms and rents them separately. Using longitudinal rental contract, census, and administrative complaint data in an instrumental-variable design, we find that subdivision lowers both bedroom rents and standard apartment rents, but increases complaints related to noise, fire hazards, and other housing-related nuisances. To evaluate the welfare and distributional consequences of subdivision, we develop and estimate a structural housing market model with heterogeneous households and endogenous remodeling decisions. We find that migrants without Beijing hukou, non-college households, and smaller households benefit most from the rent reductions generated by subdivision, whereas higher-educated local households and families with children bear larger externality costs. Although a complete ban on subdivision increases aggregate welfare, it disproportionately harms the most disadvantaged renters. Counterfactual analysis shows that targeted restrictions or Pigouvian taxes with resident rebates can substantially reduce externalities while preserving much of the affordability benefit.