In a housing market that is beginning to show signs of growth there are new opportunities for property developers. If you are thinking of renovating for profit, make sure that you consider the following:
Know The Market
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.
Location, Location, Location
The location of your property is one of the most important factors in successful property development. To maximise the profit from your renovation you should aim to find a property in an attractive location. Attractive doesn’t have to mean an expensive location with high-end developments, but simply means an area where property is in demand. Consider areas near popular or expensive locations that also 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 could prove to be a good investment. These properties are more likely to keep or increase their value in a changeable market. Former council properties that have been bought by 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 possible properties for sale. Even if a property isn’t for sale yet, it may be worth knocking on doors in ‘up and coming’ areas to see whether owners might be willing to sell. You might be lucky and pick up a bargain.
Buy Low to Sell For a Profit
When you are searching for properties to renovate, remember that developers make money when they buy a property. This means securing the best possible asking price. When viewing properties it is a good idea to 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. It is also a good idea to 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 often have the same advantage as first time buyers; they aren’t part of a chain. Take advantage of this situation to make the lowest offer that will reasonably be expected.
Overall, remember the golden rule: 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%. If that doesn’t look possible based on the asking price, walk away.
Buying at Auction
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 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.
Get an appropriate survey of the building to make sure there are no expensive structural problems, such as damp, dry rot or a leaking roof. Also make sure that there are no legal issues and that you are sure what is included with the property. For example, does the property include access to a garden?
At the auction, try not to bid first, and wait to see what others are prepared to offer before you show your hand. To avoid overpaying for the property, be sure that you stick to the limit that you have set yourself. If the bidding does not reach the reserve price, try to speak to the seller after the auction to see whether you might be able to negotiate a deal.
Remember that if you are going to need a mortgage to buy the property you should have your finance in place before the auction. Contracts are exchanged on the, so there is no room to change your mind. Careful research in the days before the auction could turn to profits later on.
When choosing your first renovation project, is it probably a good idea to choose a modern property that needs updating rather than major renovation. For example, pick a property that needs new interiors, such as paint, wallpaper and carpets as well as a new bathroom and kitchen. 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, put together a budget for the renovation works, allowing at least 15% contingency for unexpected issues.
Make sure that you obtain quotes from a range of tradesmen and get recommendations of good workmen from anyone that you know. Choose the firms that you think will do the best job within your budget and liaise closely with tradesmen and suppliers to ensure that you receive the quality you expect. This can be especially important because you are liable for poor quality workmanship, meaning that you may have to pay later to correct defects in the property. Also, poor quality fixtures and fittings may reduce the selling price of the property.
Once you have successfully completed your first renovation project you can decide whether or not you wish to take on a more involved property development, including building extensions or remodelling the interior of a property.
Hiring a Project Manager
Consider whether you will oversee the renovation yourself or will employ a project manager to look after the day-to-day issues. If you are able to do the job yourself you may save money during the renovation, but it may not be possible to manage another job alongside the project.
An experienced project manager may help you to negotiate any tricky issues with tradesmen or suppliers that arise during renovation. He or she can also ensure that the renovation work is completed within the agreed budget.
It is important to bear in mind that developers are liable for poor quality workmanship after the property has been sold, and so it is important to ensure that defects are avoided where possible. An experienced project manager may pick up on problems quickly and ensure they are fixed on the spot, avoiding costly legal issues.
Know Your Buyer
When renovating your property think about who will buy it once the work is completed. Consider the size of the property and the likely demand for the location. 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 within the catchment of good schools, 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 personalise fixtures and fittings, but keep them smart and practical to suit the needs of the eventual owners. These considerations also apply for properties that you intend to let after the renovation is completed. 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.
Once your renovation is complete, contact a number of estate agents to get the property valued and ensure that attractive photographs are taken to show the property to advantage. Make sure that living areas are clean and clutter-free and that all work is completed to a high standard. If you have done your research well and the renovation work has added value, you should make a profit on your investment.