Investors
A step-by-step guide to starting in property development: strategy, location, finding sites, buying, finance, planning and designing for your end user.
Kisiel Group
7 December 2020
Anyone can buy a property at auction, renovate it and sell it, but do they all make a good return on their time and money? Successful property development is about maximising your return on every development.
What is a property developer? The Collins Dictionary sums it up well:
“the business of buying land and buildings and then making improvements to them so that their selling price exceeds the price paid for them”
So how do you get into property development? Start by answering some questions:
The main consideration is the choice between residential and commercial. For residential, think about:
You might decide to build leasehold flats for first-time buyers in a city location. Selecting a combination like this makes your aims much more focused.
You may start with short-term returns to build up capital and, once established, move to longer-term rental income. Or, if the market changes, you might rent for a period and sell later when prices are more buoyant.
Next, choose the location that fits your strategy. This requires research. Even if you know the area, there is much you can do to make a detached assessment.
Look at local authority development plans that might mean an area is improving. Buying before the infrastructure is in place can mean a greater return on investment, but possibly over a longer period.
Think about what your end user is likely to need. First-time buyers may want city centres with nightlife and places to meet friends, whereas a young family will look for quiet roads, good schools and open space.
Unless you happen on an opportunity by chance, it will take time and effort. Tell everyone you know that you are looking, but that is just the start:
Think about the type of site you are prepared to develop. Will you renovate and extend, or demolish and replace? Do you want a brownfield site where services already exist, or a serviced plot with utilities at the boundary? Back-garden plots have been heavily developed over the years, but planning is still being approved. Your early choices shape the business.
The more you pay for a property or plot, the less profit you will make, so know the right time to buy and calculate in advance what you are prepared to pay.
Valuing land is not a precise process, but you can use a formula to calculate the value of a plot.
Sellers want the highest price and developers want the lowest. A fair price somewhere in between means the seller does not feel exploited and the buyer does not feel overcharged.
If you buy at auction, don’t get carried away by the bidding. Keep a cool head. If a property fails to meet its reserve, there may be an opportunity to buy direct from the seller at a good price. Remember, a developer makes their money when they buy, not when they sell.
Whether to buy as a sole trader or a limited company should be decided after taking financial and legal advice, as there are tax implications and legal responsibilities.
On a small first project you may buy personally, for example by re-mortgaging your own home. On bigger projects, buying through a limited company can help with raising finance. For larger developments and joint ventures, many developers set up a separate company for each scheme, often called a Special Purpose Vehicle (SPV). Keep good accounting processes so all costs stay completely separate.
Whichever route you choose, confirm the project is feasible before you buy. A feasibility study assesses the value of the property, the practicality of your design, estimated build costs, your sale or rental projections and, most importantly, your ability to repay the development finance.
Always think about how you can add value, and buying at the right price is the first step.
Before you go through planning, value engineering can help you achieve the lowest cost on the essential functions of your development while maintaining or improving what the end user gets. Don’t confuse this with simple cost-cutting.
Value is not about waiting for the market to rise. Take a pro-active role and you won’t be disappointed with the return.
Property development is a risky business and requires investment from the beginning, so you need to know how much finance the project will need.
That depends on the size of the project, the length of the programme, build costs and the estimated end value. Get help estimating build costs and allow at least 15% contingency for unforeseen costs.
Look at best-case and worst-case scenarios, but focus on the worst case. If the scheme works in the worst case, it will do better if the best case is delivered. And be cautious with your end value estimates.
You need the right funding at the right cost at the right time, and the choice will vary from project to project.
On a small first project you may consider a personal loan, a buy-to-let mortgage, a bridging loan, family and friends, angel investors or re-mortgaging your home.
Established developers and larger projects typically use:
Grants from local or regional government are rare but worth exploring in economically deprived areas. You cannot rely on them to fund the whole scheme.
Planning permission is the point at which the balance tips in your favour. Once achieved, it takes a lot of the risk out of the development.
Without planning approval you cannot go ahead. Before you apply, design a scheme that works for your end user and for the planners. Cramming in too many bedrooms to boost margins can leave rooms that do not appeal to buyers and a scheme planners see as over-developed. The exterior needs to fit its surroundings and give buyers a good first impression.
Get it right and you will get your planning granted and be able to sell or rent the properties quickly.
A common first-time mistake is designing to your own taste. What appeals to one person does not appeal to another. It is not going to be your home, so design the space and décor to suit your end user. Set a realistic budget: avoid expensive fittings unless you are targeting the high end, but buy good quality essentials, such as appliances, that get a lot of use.
It can be. Property development is the process of adding value to a building or piece of land with the aim of making a profit, and the UK still does not have enough housing to meet demand. Whether you renovate houses, convert buildings into apartments or build new homes, there are opportunities.
The key is understanding the finance of your project and following a step-by-step process. If you haven’t developed before, take good advice along the way. If you are experienced, keep fine-tuning your skills as you take on bigger projects.
Tell us about it. You will speak to the people who make the decisions.
