Whether you are looking to become a property developer purely as a hobby to build up a nest egg for retirement, to establish a part-time or full-time job for yourself, or to create a formal business maybe at some stage with employees, there are really no barriers other than your ambition. Of course you will need some start-up finance or access to funding, you will need considerable time in order to do it properly and you will need some basic common sense and a solid understanding of the property investment basics. But the main knowledge and experience comes as you progress, and in order to get into property development, well, essentially, anyone can do it.
Naturally there are a number of key factors that you need to consider when planning your fledgling property development project, and we will outline these here, along with some common errors and misjudgements that amateur property developers tend to make. These can really make the difference between this being an expensive mistake, a frustrating pastime or you becoming a successful entrepreneur in your own right.
Write a Business Plan
However serious you are about this venture, and whatever funds or other resources you have behind you, there must be a solid and credible business plan in place to ensure your project can get off the ground. You should take advice on how to structure a business plan, and there are plenty of online resources available, but essentially, the more professional your business plan is and the more viable the business appears to be, the more chance you will have of securing adequate funding and of course, the more chance your business will have of succeeding.
You need to consider what structure your business will take and the legal implications of this, particularly if you are entering into a formal partnership or joint venture with someone. You need to address your sources of funding and you need to look at what resources you will need. You may be planning on relying on the free help of your partner or a family member, or you may have to employ someone. You may have friends in the building trade who can help you out with the development work. You also need to look at things like a website and the associated marketing costs, if you are really taking this seriously as a business.
Which Property Business Model?
The two main vehicles for property development are buy-to-let and buy-to-sell. Perhaps the first thing to consider is your exit strategy, which is perhaps not how you want to look at it, but effectively, if everything goes wrong how can you minimise your losses? This might dictate which route you go down.
Buy-to-let tends to be more of a long term property investment strategy that is a good way to start out and test the water, as it provides a regular rental income that can hopefully support you financially and allows you to move onto your second property a little sooner, if that is financially viable. You would need to seek some professional advice on how your rental income is taxed.
With buying a property to develop and sell, there is more risk associated with this method, as you are at the mercy of an often volatile property market and specific locations, but you can generally make money faster. In terms of professional advice you should seek information on capital gains tax.
What Money Can Be Made From Property Development?
There are many factors that dictate which property model you decide to pursue, but working out the income yield is perhaps the biggest. Rental yield from a buy-to-let property can be calculated by working out your annual rental income versus the value of the property. Anything around 10% is considered to be a good return. When selling a property that you have developed, a return of 30% is what you should be looking at.
What you will need to do
As with any property purchase, location is a primary consideration, but as a budding property developer there are different reasons for this. If you spot an area that is rapidly developing then you need to get in early and make a purchase in order to maximise your potential returns. Look at the various property websites online and assess prices in certain areas, and then also consider what work will need doing on a particular house. When you look at a fair price for the house now and in the future, plus the additional costs to develop it, is it a worthwhile venture?
From a buy-to-let viewpoint you need to assess whether a location is suitable for the market you want to let a property to, ie. for a student market, is it near the university campus or where there is good nightlife? Families don’t want to be in the centre of town, they want to be near schools and parks and they want a garden, whereas young professionals want a more exciting life with less hassle and hence, don’t usually need any of that.
A property has to suit the market, and as well as location that means hi-spec or mid-spec interior fittings and how many and what type of rooms the property needs. Keep to your budget, but make sure the budget is appropriate.
Get to know an area and don’t be rushed by pushy estate agents into buying a property that you’re not 100% sure about. Timing is absolutely vital. If you are looking for your second property this is particularly critical. This is a bad time to overstretch yourself financially, or rush structural or interior developments on your first house in order to close a quick sale and move onto your next property. Also, you should remember that most people look to buy properties in the Autumn and Spring, rather than Summer and around Christmas time, so plan things accordingly and don’t put the property on the market at the wrong time, just because you are desperate for cash.
Mistakes at this stage can set you back a couple of years, or could put an end to your property development career completely. That said, when you are 100% sure about a property, you need to move quickly.
Unless you are somehow starting off your property development venture with some considerable capital finance, your money will be tied up in your first property for some considerable time, and this is a very limiting factor that you have to understand and be patient with. You should seek professional advice on the financial options open to you, which will depend on which property model you are pursuing and whether you are seeking finance alone, in a joint venture or as a limited company.
Finance for property development comes in many different forms, but mainly as residential mortgages, buy-to-let mortgages or limited company buy-to-let mortgages. Funding for a buy-to-sell property is generally more expensive, as it is seen by a lender as a more short term investment, and hence they can offer higher interest rates than normal.
Also, with a buy-to-let mortgage, lenders typically want a property to be in a lettable condition immediately, as there is a risk involved for them. Some lenders will offer you a deal if light refurbishments are all that is required, but this is a difficult balance to strike. As a property developer you need to be letting the property ASAP, because two or three months of paying a mortgage on the property while making no income from it can be hugely damaging financially. So if work needs doing to make a property lettable, this needs to be considered when seeking the right finance package.
Bridging finance is common in property development, to allow you to buy a property while still seeking to sell a previous one, and is becoming much cheaper2. Also, development finance is common where there is significant building work required, or you have bought a plot of land only and are starting a ‘ground up’ building project from scratch.
If you are starting out as a property developer then whether it is buy-to-let or buy-to-sell, there are light to heavy refurbishment loans available also. These generally can’t be searched for online, and you would have to approach an individual lender who would tailor a deal specifically suited to your circumstances, but typically the loan is for the period of refurbishments and is repayable upon sale of the property.
Where finances, skills and knowledge or, let’s face it, courage is somewhat lacking, one of the most popular ways to get into property development is to join forces with a friend, colleague or family member. From a practical point of view this shares the burden and the workload, but it is also possible to share the financial risk of the venture based on how you structure the partnership.
You will need to formally set up the company and therefore will need professional tax advice, as well as establishing the proper legal structure of the company in terms of ownership, liability and how profits should be shared.
In terms of securing finance as a joint venture, to most lenders you will still be classed as first time developers and hence, you carry the same risk. So it could still be quite hard to secure finance and it is recommended to find a reliable broker, they will search the right finance deal to suit the status of your business and what you aim to do.
Common Mistakes Made By Fledgling Property Developers
Getting the market wrong
This can mean buying a house in the wrong area for students or young professionals and not being able to let it out. You may also believe a property will gain in value in a certain area, but the market doesn’t go that way or it is a property type that struggles to sell generally, and your profits are reduced or non-existent.
Another way you can mis-judge your market is by refurbishing the property with fixtures and fittings that are inappropriate, ie. they don’t last and therefore add costs, they don’t appeal to your market so you have to replace them, or you forget about the exterior of the property and this becomes a barrier to selling or letting it. On the flipside, you can go over the top with lavish fittings or plush carpets that are unnecessary for a student property, for example. Also, don’t get fixated with personal tastes and take advice to tailor your décor and furniture to your target market.
It is also important that you develop the layout of the house in keeping with the type of buyer or tenant you are looking for. Don’t cram the house with bedrooms if your market is for a young family who prefer extra space or an extra bathroom. Think about layout and the flow of rooms. Likewise, for buy-to-let students, you won’t need enormous dining or living spaces or en-suite bathrooms, and you should probably go for four bedrooms and not three.
Naivety with builders
Unfortunately unscrupulous builders or other tradesmen do exist, so if you are dependent on them, get various quotes and make sure they provide references. If possible get them to sign a fixed price contract properly drawn up by a solicitor, and try to negotiate penalty clauses for the work being late, as this could have serious financial implications for you.
It is so tempting to push the boat out that little bit more, but you should only borrow what you can afford in the first instance. If you get the first project right then others will follow and they should gradually get easier to manage, so it will benefit you in the long run to be more cautious at the beginning. Seek professional advice and shop around for the best finance deals that are right for you, and be realistic over the cost and time of projects.
Of course you want to make money, but you need to be practical and realistic about the returns on your costs via selling or renting the property. You may have spent more on the refurbishment than you planned, or the property might not have gained in value as you had calculated, but don’t make the matter worse by ramping the price up and making other people pay for your misjudgements. You might make less profit but you still need to sell or rent the property in order to create funds to move onto the next project, when hopefully you have learnt from all these valuable lessons.
1. www.startups.co.uk "How to become a property developer in 8 simple steps"
2. www.ThisisMoney.co.uk "I want to get into property development for the first time, what sort of mortgage do I need?"