Property Development is really quite straightforward. But a lot of people struggle with knowing how to get into property development, or how to become a property developer. So I thought I’d make it as simple as I possibly could and lay out the steps you need to take.
If you’ve ever watched one of those property development renovation shows and thought “I reckon I could do that” you’re probably right. But the difference is, most people will just talk about it, and only a very small percentage will actually give it a bash.
Of those I’d say only half (being optimistic) are successful on their first project and do another one. But nobody wants to admit to trying property development and failing, so we never hear about them. It’s always a ‘ learning curve’ or ‘unexpected market changes’.
I’ve been developing properties for the last 12 years and will freely admit I’ve made losses on some of my deals. Why? Cos I was stupid.
I priced works incorrectly, I paid too much for the house or the contractors, I sold too low, I panicked, I was greedy, I forced a deal because I wanted to do it… the list goes on.
But I’ve learnt from each mistake. OK sometimes I had to make the mistake twice before I learnt, but whatever. I’m a slow learner.
It does mean I’m in a great position to give you the quickest and dirtiest guide to property development though.
The difficulty of finding a deal is directly correlated to how greedy you are. I’ve read books and attended the seminars once, so I only wanted 20% BMV with minimum 30% net profit. Then I realised I’d waited 6 months and still hadn’t found anything.
So I grew up and adjusted my target. Back in the day I would go for anything over 10% net return on my investment – there was no lower limit on the cash profit. If I could put £15,000 into a deal and make £1,500 profit – then I was happy.
In retrospect, it was a little silly because I had no leeway in case anything went wrong. But you live and learn.
But what I learnt was that by having a more realistic target I could find 3 or 4 property development deals every time I went looking for one, instead of waiting for 6 months and finding nothing. My usual deal when I got into the swing of things was a £60k house and I’d make around £10-15k profit on it.
But when I first started I was looking for a £100k house I could buy for £80k and make £30k profit on. It dawned on me pretty quickly that if I did 1 or 2 of these ‘normal / easy’ deals in the time it took me to find one of these amazing deals, I could make just as much money.
So I stopped looking for unicorns and instead went for the pretty donkey.
Top tip; set realistic expectations for profit targets and you’ll find more deals, more quickly and actually be able to make a profit.
The actual searching for the property development deals is painful and slow process, but it’s mostly just grunt work. People talk about building relationships with agents and getting the best deals given to you before they reach the market…. Fine if you’re best friends with the agent or buying a property per month off them. Otherwise expect to get what’s on the market.
And you know what? There are profits to be made there still! Don’t be greedy and you’ll get rich. Odd, but true.
You can make £740,000 in the next 12 months without using any of your own money! I can also win the Miss World competition in the same timeframe. I mean, neither are completely impossible, but … highly unlikely.
When I started, I used my savings and I bought cheap houses. I had around £30k in cash and was looking at buying properties for between £40-60k. That money had to pay for the deposit and the works, so it was tight.
I used bridging finance to help fund the purchase of the property and would usually go for 70% loan to value. This meant on a £60k property I would need to put in £18k of my own money and use £42k of bridging loan.
I then had a budget of £12k left for everything else; stamp duty (none at the time on those houses), legal fees, and of course the works. Sometimes this went a little bit over and I might put a kitchen purchase on a credit card or on finance from the retailer. Not something I’d recommend, but it’s what I did at the time.
I’d then hope to get a revaluation or sale price of around £95k which roughly gave me £15k profit after costs.
I eventually started refinancing the properties instead of selling them, in which case I’d leave around £9k in the deal but expect to make around £200 net profit each month. For the maths geeks, that’s a 26% return on the cash I used.
Funding can be a pain when you first get started. While Bridgers are interested in the deal, they are also interested in you. They want to know if you can make a good go of it and how you plan to exit and repay them. They don’t care if it’s via a sale or refinance, but if you go over their time frame, they will be looking for their money back through one means or another. Repossession being the harshest remedy they can pursue.
The best advice I can give is to speak to a broker who knows the bridging and development market. One of the main reasons I got qualified as a Mortgage Advisor was because I found combining my experience as a Chartered Surveyor helps place the right project and investor with the right lender.
If you ever want a chat about how to raise finance for one of your deals, or how to refinance it once you’re done, then let me know over at Fogg Financial.
Top tip; figure out what your sale price and revaluation price will be before you start. These numbers are often slightly different (hopefully not massively). At least then you know your two exit options at the end of the project. Let your broker know and they should be able to move quickly to help you get your money out and move onto the next project.
Now we’re getting onto the fun stuff. You might assume this is all construction work and ripping kitchens out, but it can be purely paper based.
Let’s say you buy a property with 70 years left on the lease. You can extend that lease and increase the value without doing any construction work. Or maybe you can apply for planning permission and sell it on to someone else to do the actual work.
It is possible, but let’s be honest – most developers are looking for something to add their own stamp on. Even if that stamp is magnolia and a B&Q kitchen.
Top tip; look at sold prices, not on the market prices. Depending on what the market is like, your end value is likely to be somewhere in the middle. More importantly though, look at what sold and look at the internal pictures. That gives you an idea of what standard of finish your market is looking for and what price you’ll get for it.
Give the market what it wants – and no more. There is no point putting marble kitchen tops in a £50k house. But there’s no chance you’d get away with painting £15 doors in a £1m house. So do what is expected by your market, and be sure not to get carried away because it’s what you would want in the house.
The old saying ‘You make your money when you buy’ is only partially true. Although technically, you don’t make any money when you buy, you only make a profit when you come to sell.
Sure, ideal world you would buy low, spend little on the place, sell it for loads and make a huge profit. But it goes back to what I was saying at the start. Do you want to wait for ages to find a great bargain or do you want to focus on the other two elements to make your money?
When you come to sell, this is where you actually make the cash to go and pay for baked beans or smashed avocado on toast (depending on your age bracket).
Top tip; to dress or not to dress a property? Personally I’ve never bothered dressing properties, but I tend to focus on cheaper properties for first time buyers or investors. Housebuilders have spent millions researching whether or not it’s worthwhile doing, and always have a show house in a development, so there’s probably some research you can piggy-back off there.
When done well, I believe that dressing a property can increase the saleability of the property. Not necessarily the price achieved – but I’m open to being convinced on that. How quickly you can move a property on does impact on your bottom line, so you’ve got to weigh up the cost of dressing a property properly versus how much extra it might get you, or how much quicker you’d achieve a sale.
As a ballpark, I think to dress to 2 / 3 bedroom property you can expect around £2k of costs.
That’s about it really. There’s lots of finer details that you should probably learn before you give it a whirl, but it is something you can learn as you go. Just expect to make a few expensive mistakes if you want to do it via trial and error.
That should put you in a reasonable position to have a good crack at property developing on your own. Ask advice when you need it, but only of people whose advice is worth something.
Remember the profit you make is directly correlated to how much risk you take. Figure out how to mitigate as many risks as you can, but don’t expect a risk free 25% return on your investment! If it was that easy, everyone would be doing it. And despite what the internet would have you believe, everyone isn’t doing it!
If you want an experienced investor, developer and mortgage advisor as part of your team, you can get in touch here. I’m more than happy to discuss specific projects with you to see what lenders might think when reviewing it.
Good luck whatever you decide to do!