Becoming a property developer: What you need to know
Property has long been seen as a safe and rewarding investment, particularly in the UK.
It’s based on land – and they’re not making any more of that. We live on a small island with a growing population where house values are rising at a rate that brings returns far outstripping those provided by bank deposits or even the stock markets.
This is likely to continue. Last year, property experts Savils brought out a report which forecasts an annual compound growth rate in house prices of more than 14% over five years.
But, if the only house you own is the one you live in, your reaction might well be: “So what?’’. If you still want a roof over your head, it’s not an investment you can realise and anywhere you want to move to will be getting more expensive.
There are, however, plenty of people who do make money out of property, who find ways of using property as an investment and who reap all the rewards of a rising market.
But how do they do it? Or more importantly, how can you do it? What do you need to know if you want to become a property developer?
One of the many attractions of property is that it seems easy to understand. Everybody knows how it works on the highest of levels. You buy a plot of land, build a house on it, sell it and make a tidy profit. Or you buy an old house, do it up and sell it for more than you bought it for. Right?
If only it were that easy.
Property development might seem simple, but is, in fact, far more complicated than it looks and many a novice has got their fingers badly burnt. Yes, you can make a lot of money, but the flip side is that if you don’t know what you’re doing, you can lose a lot.
Before you do anything else, even if property development is going to be a part time activity, you need to draw up a business plan, a road map of sorts detailing where you want to get to and how to get there. This should list your objectives and then provide a step-by-step carefully thought out outline of how you’ll achieve them.
You must decide at an early stage whether you are going to opt for a buy-to-let or buy and sell strategy.
Buy-to-let involves investing for the longer term and is a way of building up a portfolio of properties. However, the government has come to see buy-to-let as distorting the housing market and has introduced a stamp duty premium and restrictions on the tax relief on mortgage interest paid on buy-to-let properties, which has made it a less attractive proposition.
Buying and selling offers a quicker return on investment - and many argue you should aim for a return on your capital of at least 30% - although adverse market conditions can delay this and profits of more than £10,900 are subject to capital gains tax.
Finally, make sure you take into account all possible expenses. If you’re going to take on staff – which is likely if you’re thinking of buying land and building from scratch – there are all the attendant costs apart from wages.
Some examples of other expenses to bear in mind are:
- Hiring contractors
- Structural survey
- Fees to external agents
- Structural issues such as subsidence or even asbestos
- Maintenance and repairs
Can you realistically say you’re prepared - or will be prepared - to not only afford such payments, but to manage the processes and the teams? As soon as you start to scale your ambitions and working with people, property development can go from being little more than a hobby to a business - and that requires a whole other set of skills.
Have you got what it takes?
Do you have the necessary practical skills to develop a property? Many people have done well out of property development by buying houses and renovating them and they have been successful because they have the skills and experience in building work themselves that has enabled them to build up a network of other skilled contractors, such as plumbers, electricians or joiners. This takes a lot of cost and risk out of the whole business. If, however, you’re completely new to the building trade, you could be at the mercy of unknown contractors upon whom you will be totally reliant - and with little experience, you can be in a weak position for negotiating the best prices.
Obviously you’ll also need money and, if you’ve drawn up your business plan properly, you’ll know just how much is required. However, it's important to keep in mind that the building trade has processes around financials you may not be aware of or used to - for instance, you won’t get 'paid' until the project is complete and the properties are sold, but all your suppliers and contractors will want paying as they work. You have to have the cash resources to fulfil this need, and it can therefore require a greater amount of money than you may have anticipated.
Do your homework
Having done your business plan and ensured you have the necessary skills and finance, you’re ready to go out and start buying property. Right?
Kind of. But now the hard work begins.
The most successful property developers fully understand the importance of location when it comes to property investment.
But remember, you’re buying somewhere as an investment, not somewhere that you want to live in yourself now. You ideally want a location where prices are set to rise, not where they have been rising dramatically for several years. You must do research to find areas of likely growth, or gentrification, where other developments are taking place or are planned. Look for nearby schools – especially those with a good rating - public transport links and neighbouring green areas.
When the A1 Bypass past Gateshead was announced, Sir John Hall bought a huge swathe of unwanted and neglected land just off the proposed new road. It seemed a little concerning to many at the time, but Sir John had a vision - and that area went on to become the MetroCentre, helping to make Sir John a multimillionaire.
Find out how much other properties go for in a particular area and ensure that those prices meet the requirements of your business plan, but keep in mind that once you’ve found a property, the research doesn’t stop. Are there any restrictive covenants and how much refurbishment is needed and at what cost? Again, can your business plan accommodate that?
Know your buyer
Before you invest in a property, you must have a clear idea of the kind of person or people who are likely to buy it.
Are you going to make the property so it’s suitable for students? That would be a bad strategy if there’s no student population in the area. Similarly, if you’re considering a small unit of retail properties in a residential area, are you confident there’s a need? Is the demand there for shops or restaurants?
As we shall see, you need to add value to a property or land, but that has to be carefully judged. There’s no point in developing or refurbishing a property to the standards required by a senior executive if your target buyers or renters are low income workers.
Make sure the price is right
Your research should have given you a precise idea of what is the right price for a property and your aim should be to pay below that price.
One popular option is to look out for properties that have planning applications in with the local authority. They might accept a good offer subject to planning permission, and if they eventually get planning permission, you get the benefit.
Similarly, try to find someone who really wants to sell, as you’re more likely to get a better deal. It might sound a little cut-throat, but you’re in business now - you’re much more likely to be able to negotiate an attractive deal from a seller who needs to sell quickly as, for example, they’re moving abroad, as opposed to someone who is selling to downsize but has no real restrictions in terms of time.
It is often said that in property development you make more money when you buy than when you sell. Drive a hard bargain to ensure you will get the profit your business plan calls for. If you can’t, walk away. There will be other opportunities. When it comes to property investment, no deal is certainly better than a bad deal.
Other ways to become a property developer
This probably all seems daunting. And for many, it's entirely understandable. Although on the face of it property developing is a straightforward and profitable way to invest, in practice, it calls for a lot of knowledge, experience, hard work and capital. If you lack any of these, you could lose a great deal of money.
However, that doesn’t mean you have to abandon the property market altogether. There are other ways of investing that mitigate much of the risk, allow you to benefit from the expertise of others and to share in the rewards and excitement of the property market.
Take property co-investment - or joint venture investing - as an example. We talked about this form of property investing in more-depth recently, but it’s essentially the ability to invest alongside the builders of the properties themselves.
Whereas buying directly from a builder off plan has been a relatively popular option for some time, investing alongside the builder at an even earlier stage - often at the point where you’re actually buying the land upon which the properties are built - has only started to increase in both popularity and accessibility in more recent times.
Whilst it does bring with it risk - the most notable being property prices fluctuating in a downward style over the course of what could be a two or three year investment period - that risk is often balanced out by your early-stage investment. The calculations vary from opportunity to opportunity, but generally speaking property prices would have to fall by 20% during the development period before you actually lost money.
Making the decision to become a property developer
Property development has long been an attractive proposition. It’s been popularised by TV shows and celebrities throughout the last decade or two in particular and there’s little doubt that it can be extremely rewarding. Developing or renovating a property and selling it for a profit can not only be financially rewarding, but it can be an extremely proud moment.
But as with everything, it’s very rarely a smooth ride, especially if you’re new to the industry. On the highest of levels it’s about producing a property that’s worth more than you paid for it and selling it for a profit, or buying it and letting it out for a monthly profit - but there are hundreds of individual components between these start and end points that many find make it a process that’s best left to the experienced professionals.
A decision that only you as an individual can make, the most important point to keep in mind is if you’re considering becoming a property developer because it’s the only way to get involved in property, this couldn’t be any further from the truth. The reality is, there are arguably more options available to get started in property today than there ever have been, almost regardless of your available budget or preference of how to be involved.