Property development can seem like an ideal career for anyone fed-up with their boring desk job or looking for a second income for retirement. Requiring little prior knowledge and offering high rewards for success, developing property looks like easy money. But don’t be fooled. There is more to developing new homes than meets the eye. In fact, for the unprepared, a bad investment can mean the difference between success and financial ruin.
1. Think Carefully and Do Your Research
If property development is your ambition, you should have thought carefully about whether you on a position to make your dream a reality. It is a bad idea to become a developer if you currently have debts or expensive financial commitments. New developers need access to finance to get started and mortgage lenders are unlikely to give money to anyone who manages their own finances poorly or who is otherwise a bad risk.
Before you think about buying you will need to do a lot of careful research on the property market and have a business plan. It will also help if you are well organised and have the tenacity to keep going when problems arise. There will be ups and downs, as with any new business, and it will be helpful if you can cope well under pressure.
Buying a property is a serious financial commitment. You will need a lot of money up front in order to get started. This means you should have budgeted for at least 25% of the value of the first property you hope to buy. You are unlikely to be able to get a Buy to Let mortgage for more than 75% LTV (loan-to-value) and you should shop around for a good deal. In addition, you will need to be able to cover other expenses, such as the property survey and valuation, legal checks, instructing a solicitor, stamp duty, and renovation costs.
2. Know What You Want From the Business
Before you begin life as a property developer you should consider whether this kind of investment suits your needs. What kind of yield do you expect from your investment? Do you know the risks as well as the benefits? Remember that the value of property can go down as well as up, and that it is possible to lose money.
If you need to take out a mortgage in order to buy property for development you will increase the amount of risk that you are exposed to. For example, if you take out a mortgage for a property and the property sells at a loss, you are still liable to pay back the mortgage. This means that you could lose your original investment plus any additional shortfall. It is possible that you could end up with thousands of pounds worth of debt.
While there are risks, there is also money to be made in property development. If you are prepared to do careful research into the market it is possible to get a good return on your investment.
3. Build Strong Relationships with Trustworthy Professionals
You certainly don’t need to be an expert in property construction to become a developer, but it will be important to build strong relationships with those that have building expertise. Before you buy, you will need to employ a quantity surveyor to determine the cost of renovation work and you may need to employ an architect if you want to carry out major renovations. You will also need reliable tradesmen to do the renovations, and once the work is completed you are likely to need a letting agent or estate agent to let or sell your property to its new residents. Good relationships with reliable professionals will save time and money, as well as maximizing the profit you make from your investment.
4. Find the Right Location
The location of your property is one of the most important factors in successful property development. The best locations are where property is in demand. Consider areas near popular or expensive locations that benefit from good transport links, properties in the commuter belt, properties in the catchment areas for good schools, or properties near a lot of amenities.
Properties on the fringes of a popular location, sometimes called ‘up and coming’ areas are more likely to keep or increase their value in a changeable market. Former council properties that have been bought by former tenants can be a great opportunity to secure a cheaper property in a good location. It may be worthwhile driving round suitable areas looking for properties for sale. Even if a property isn’t for sale yet, it may be worth knocking on doors to see whether owners might be willing to sell. You might be lucky and pick up a bargain.
5. Buy Low, Sell High
When you are searching for your first project, remember that developers make money when they buy a property. You will be able to make a profit if the final value of the property is equal to the purchase price plus the cost of renovation plus 20%. This means you must secure the best possible asking price.
When viewing properties bring tradesmen with you to give you an insight into the costs involved in renovating the property. Many tradesmen will offer this service free of charge or for a small fee, and their advice can also help in deciding what type of survey is required before putting in an offer.
Take the opportunity to have several viewings of the property so that you can identify any issues that you could use to negotiate a lower asking price. Look out for properties where planning applications have been submitted to the local authority. The agent may accept a lower offer subject to planning permission and if the planning permission is granted later you can benefit.
Bear in mind that developers aren’t part of a chain. Take advantage of this situation to make the lowest offer that will reasonably be expected. If your profit margin doesn’t look possible based on the asking price, walk away.
6. Look for Bargains and Start Small
Many of the best property deals can be found at auction and you can pick up a bargain provided you stick to an upper bidding limit. In the case of auctioned properties it is very important to do your homework before the auction, making sure that you visit the property with tradesmen to get a clear idea of the costs involved in renovation.
For your first renovation project, choose a modern property that needs updating rather than major renovation. Also consider who your buyer will be; if you are aiming for the top end of the market you may have to budget a little more for fixtures and fittings. If you haven’t already done so, allow at least 15% contingency in your renovation budget for unexpected issues.
7. Know Your Target Tenant or Buyer
Before you start renovating, think about who will live in the property once the work is completed. A one or two-bedroom flat with great transport connections may be ideal for young professionals, who would expect a modern, well-designed space. Families would look for larger properties with at least one large communal room, a modern kitchen and bathroom and at least three bedrooms.
Remember that you aren’t renovating your own home, so it is appropriate not to personalize fixtures and fittings, but keep them smart and practical. To maximise the profit for your renovation, keep costs to a minimum and target every aspect of the renovation to suit the needs of your intended buyer/ tenant.
If you have done your research well and the renovation work has added value, you should make a profit on your investment.