The first thing to say at this point is – how does the assessment for being a good property developer actually work? Is it calculated on the number of properties that are well developed or how much profit is made from said properties? The answer is that it’s probably a mixture of both. Being a property developer is often a very lucrative venture, that’s no secret, and there is potentially a lot of money to be made. The media would have us believe that all property developers are after a ‘get rich quick’ scheme, and whilst it’s absolutely recognised that serious money can be made, the other side of the coin is the reality that actually, it isn’t easy and it is a lot of hard work, don’t be fooled into thinking otherwise. It isn’t just a case of finding cheap properties, renovating them and then selling for a profit. It’s much harder to find the right properties, it takes perseverance and then of course you are always at the mercy of the unpredictable property market.
That said, it is a fairly straightforward way to work. There are no exams, or formalised assessments, which therefore means that it’s an inclusive sphere and technically open to everyone. If you have amazing DIY skills then you can definitely put those to use where appropriate as well to save yourself some cash. Obviously the major works like gas, electrical and structural jobs have to be completed by professionals, but there’s no reason why you can’t contribute to your own project.
The other benefits include being able to work flexibly. You can fit property developing around your own schedule, do it in your spare time alongside a day to day job – as long as you have the time and resources to be on-site where necessary to supervise tradesman and view and buy new properties.
If the more complex renovation seems like too much for you to handle easily, then a nice profit can be made from buy-to-let ventures. That way you can hand over the bulk of the work to letting agents which can really reduce the day to day stress for you.
But if you’re certain that dedicating yourself and your time to property developing is the way to go, then there is some guidance that it’s basically imperative that you follow. Firstly, be prepared. There aren’t boxes that you can slot things into nicely that need to be dealt with, you really will just have to read around the subject, as it were, and learn what needs to be done, how, when and why for yourself. Secondly, do your research. Look at previous developments in your area, look at what was developed in which area and why. Look at how much profit those projects turned over, look at how long they took and assess those answers against what you imagine you could do. Plan your long term goals, i.e. what capital growth you predict against what rental value.
Long term planning
If this is what you’re after then buying to let is a smart choice. Having a portfolio of property will give you a solid income. But bear in mind that it isn’t quite that simple. You’ll need a buy-to-let mortgage, a 25% deposit and any income will probably have to be declared to HMRC because it’s seen as a salary. If you’re a higher earner that will be taxed at 40%. If you have the resources to tide you over until your rental income starts coming in, you’ll be in a good position.
Short term planning
Buying to sell offers a quicker return on investment. The preparation is quicker, it’s ready quicker and consequently there is potentially more profit to be made. However, you are at the mercy of market conditions so watch out for any negative equity. Also, any property sold will be subject to capital gains tax.
- To buy as a sole trader?
- Or set up as a limited company?
As a sole trader it’s not that easy to navigate and may well be worth seeking professional advice from the experts because for one thing there are complex tax implications. With a limited company you can offset the interest costs against rental or sale of property income.
Making a profit
Now comes the more appealing part of being a property developer – working out how to make the biggest financial gain. You should aim for around 30% return on investment (ROI) and this should be on top of purchase, renovation and resell costs.
It’s also essential to have a detailed financial forecast and watertight business plan to keep things in check.
Consider your own expenses – how much do you need to keep things ticking over during the time you own the property? Along with that minimum figure, ideally you will also have enough to invest in buying the next property.
If you’re leasing your property then it’s rental yield that you need to calculate. There are a few different ways to work this out, but generally you divide the total amount minus the running costs by the total amount invested to buy the property (including all fees).
Down to the details
It’s been said before, but financial planning is essential. Things to take into account include:
- How big the project is.
- How long it takes.
- The total sum of the costs involved and how much you can rent it out or sell it for once the work is completed.
For most property developers the reality is that they have to take out a mortgage on the property they’re buying. This is a relatively simple process, but around 25% of the purchase price will be needed upfront as a deposit.
Auctions are another option to get a property bargain. But that said, do bear in mind that most auction houses will need full payment within 28 days so having a lump sum at your disposal is a must. Although some lenders may agree in principle before the purchase which gives a bit of breathing room.
When you’re looking for the best property location, it might seem the simplest idea to go for a cheap area but this isn’t such a good plan because there’s likely to be a cap on the maximum price you can sell for. Instead, do your research and look for a property in an area that’s up and coming, somewhere where there’s recent local investment and somewhere with a good infrastructure so schools, hospitals and shops and public transport are all within easy reach. You are looking for signs of growth which will benefit from your development project.
Buying at a competitive price
It sounds counter-intuitive, but property developers make money when they are buying, not selling. Watch the purchase price because the more you pay, the less the return on your investment. Do the market research and make sure that the potential property is a sensible price, check out how much similar properties have been sold for, look at rental values and beware of market saturation. Property comparison sites can often be useful here.
Buying at auction might net you a bargain as well, but be careful what and how much you bid for. Research the property first, work out a maximum bid and stick to it.
A property solicitor could be worth their weight in gold here, wading through the legalities like having a structural survey done, checking restrictive covenants and planning permission possibilities. Being a landlord comes with all sorts of responsibilities so it’s best to get the
advice from someone really in the know.
Would you want to be your tenant/buyer?
Because that’s the view a good property developer should have. Renovate sensibly to the extent demanded by your target market, for example, don’t put in a £5000 kitchen for a group of students, save that for high end customers only. Create a budget and stick to it but don’t scrimp on renovation costs for the basics because the fixtures and fittings need to stand the test of time. Keep the exterior of the property well maintained and you should end up with a desirable property that will make you a nice profit.