How to start a property development business
From property business strategies to avoiding pitfalls, here's our step-by-step guide on how to become a property developer
- Property development business strategies
- How to avoid property business pitfalls
- Business models: Buy to let
- Tips for property development success
What is property development and who is becoming a property developer suited to?
For those who are keen on DIY, or want to escape their day job, renovating a house can help provide an outlet for creative urges, pent up after sitting in an office all day. And it is not as if the sector requires any particular training or qualifications and neither is there a strict template for success.
Rather than having to struggle through any bureaucracy to obtain licences, or cram hard to try and pass an exam, you are officially a property developer from the day you sell your first house for profit.
Another factor it has in its favour is the lack of any necessary overheads. Birmingham resident Mark Smith set up a property company, Always Home Ltd, at the tender age of 29. He told us that, “initially, overheads were very low and therefore running costs were easily covered by the capital injected by the directors,” he says. “As most of the work is ‘on site' at different projects, and not customer facing, we didn't need an office either.”
Although Smith gave up his job for his new business, it is possible to become a property developer while still working. Rather than having to jump in feet first, you can support your fledgling business with your existing job, thereby minimising the risk.
By working evenings and weekends it is perfectly possible to find a house, renovate it, and then sell it on within a six-month time frame. However, the quicker you want to turn a profit, the more time you will need to dedicate to it.
Neil Lewis, co-author of ebook Property Development Secrets, told us: “You can become a successful property developer alongside your existing job. However being flexible about when you're able to view a property is crucial to getting the best deals. That's why City bankers tend to stick to Buy to Let investments because it's more hands off.”
To help formulate your property business plan you may find it useful to download our free business plan template.
Planning ahead: Your property development business strategy
The economic downturn has burnt the fingers of thousands of property developers up and down the land. When researchers from zoopla.co.uk compiled a national house price survey in June 2011, they found that 80% of houses purchased since 2006 had fallen below the value of their purchase price. Some developers who built their portfolio before the recession have recorded losses of up to 30%, as prices have fallen far below their original predictions.
This bitter experience demonstrates the value of forward planning; although few could have predicted the onset of such a deep recession back in the boom years, many developers would have saved a fortune had they been more prudent, and accepted that the rise in house prices wouldn't continue forever.
If you want to make money in this business, you have to take a pragmatic view, understanding that this is an industry acutely prone to boom and bust. And, because both house prices and rental values have stagnated, it's more important than ever to get maximum value for your property.
You need to check out what is on offer, what you can afford, and the old adage still rings true – it really is about location, location, location. Like any new venture, you need to think of your property as a product – who's going to be attracted to it, where will they want to be situated and what will they expect, whether it's first time buyers or retiring couples.
You also need to consider the long-term prospects of the area. If companies have gone to the wall and jobs have been slashed during the downturn, you may struggle to sell housing because local residents aren't willing to spend money, and outsiders aren't prepared to move there. On the other hand, if you look around you and see new businesses, new jobs and new families, there's every chance that the local property market is buoyant.
In addition, make sure you don't pay over-the-odds when you come to buy. Sites such as Right Move allow you to compare the prices of properties in your chosen area, so you should get a good idea of what your target dwelling is worth.
“You have to keep in mind that profit is in the purchase price,” says Brian Steel, an innovation advisor with Enterprise Europe who commands extensive personal experience of buying and selling commercial and domestic property.
“You buy as low as you can in order to achieve a profit, but you also have to be aware of the prices in that area, and find out what other developers are doing nearby.”
Again it all comes down a good knowledge of the market, which can only be achieved by research. Find out as much as you can from the internet, newspapers and estate agents themselves – don't just rely on watching the plethora of property programmes that currently appear to have a monopoly on daytime TV scheduling.
“You just cannot overemphasise the importance of research”, says Nicholas Leeming, business development director at zoopla.co.uk. “You need to know what the demand is and don't think that the first property you see is the one you've got to have – being impulsive is one of the biggest pitfalls and that's why research is so vital.”
Leeming adds that it comes down to two very specific qualities: an understanding of the market and good judgement. “Don't let your heart rule your head – be practical and don't let yourself be rushed into a snap decision,” he says.
Steel is keen to point out the importance of tailoring your development to the demand in that area. “You've got to be sure of who you can sell the property to. There's no point buying a five-bedroom house to convert into a student let if the nearest college is 20 miles away.
“In the same respect, there is little point in developing a very high spec property in a run down area because you aren't going to attract the right kind of buyer.”
Steel also advises getting a structural survey. “A buyer's survey isn't worth the paper it's written on. Some people buy property blind, then end up making a loss if there are serious problems with it.”
But probably the most important thing to remember to make sure your eyes aren't too big for your wallet. It might seem like an obvious suggestion, but it is all too easy to go over budget chasing that ideal property and if the housing market were to change you might find yourself without a roof over your own head.
Start small and move forward by building up experience from each project, and by learning from your mistakes you will be able to take on more and more properties with confidence.
How to avoid property business pitfalls
The old adage tells us that no investment is as safe as bricks and mortar; but recent history has proven the folly of this notion. Property development is clearly as vulnerable to fluctuation and wider economic change as any other industry.
And unlike other businesses, in property development when things take a turn for the worse, there are very few ways to cut costs or reduce overheads. When times are hard you could be left with a house you cannot shift, fast decreasing in value.
Tracy Kellett of BDI Home Finders, a firm which provides advice to property buyers, says that it's important to look at the rental yield of a property in case you have trouble selling. “In the current market, anything above 5% rental yield is OK. To work out this figure divide the annual rental divided by the purchase price,” says Kellet. “If you are a cautious investor, go for the best quality property you can afford in the best possible area. You will not lose out in the long term.”
Another major downfall with becoming a developer is that you need money, and lots of it. House prices may have fallen slightly recently, but the average UK home still costs well over £200,000. So unless you plan on investing a lot of time renovating a really run down property, a source of finance is a must. And because of such high prices, until you make your first sale it's often impossible to grow or expand.
During the early stages of your property development career, you'll have to be patient as the funds build in your coffers. You'll also have to be resourceful, by shopping around, and utilising specialist sites such as 85percent.co.uk, mortgagesforbusiness.co.uk and ebslfinance.co.uk, you may be able to secure a crucial source of finance to get your venture off the ground.
You also have to pay close attention to stamp duty when buying property. The current Stamp Duty Land Tax threshold is £125,000 for residential properties and £150,000 for non-residential land and properties. For more information, check out the government website here.
It's clear that becoming a property developer has the potential to lead to significant rewards, and with the right research and some level-headed judgement you could have the right foundations to build a strong business venture. But remember, in property development timing plays a huge part, and you need to be able to judge whether now is the right time for you.
Business models: Buy to let
Despite the general stagnation in the property market, the buy-to-let sector remains relatively buoyant; according to the Council of Mortgage Lenders, buy-to-let investment in the UK rose by 22% in 2010. The attraction is obvious; considering current rental prices in London, so on paper, it would seem like a way of making significant returns on an investment as well as an attractive career option. However, buying-to-let is no get rich quick scheme and there's a lot of competition out there.
To ensure the property will pay off, it's important to weigh up its potential to make money both now and in the future. Buy-to-let investors need to carefully assess the types of people who would be attracted to the property.
Consider its strengths and weaknesses compared to similar properties and, while the advice of your estate agent will be of some help, they are only going to be looking at the short term and will not necessarily be thinking about an investment that is going to bring in money well into the future.
Buy-to-let investors also need to add into the equation the fact that the property will not always be rented for 12 months a year. Even if you do find the ideal tenant, there is no guarantee he or she will stay for a long time thereby guaranteeing you a solid monthly income.
For example if you were to buy a £275,000 two-bedroom property to rent in South London, the figures might not be quite what you would expect. An estimated £1,000 a month rent with an average of one empty month a year would leave you with an annual income of £11,000.
Once you have deducted costs, including the management fee in some cases, furnishings, maintenance and repairs this figure ends up nearer the £8,000 mark. While not to be sniffed at, this means you would need to be paying significantly less than this on the mortgage for the property over the year before you begin to see a decent profit.
And of course there's the additional costs, both in time and money, of maintaining, running and furnishing (if necessary) the property, all of which need to be taken into account. You can employ a management agency to help cut down on the hassle of finding the right tenants and then dealing with their problems, but they will take up to 15% of your rent for the privilege.
Greg Heywood started building up a portfolio of properties in 1993. He got to the stage of renting out up to 30 properties at any one time. Having built up enough capital, he set up his own estate agency in Milton Keynes called The Step, which offers alternatives to simply selling houses – such as a part-exchange package. At one stage, the company was the biggest buyer of residential properties in the UK. The company also offers services such as a part exchange service on properties. Currently turning over an annual £35m, Haywood said the buy-to-let market proved more problematic than expected.
“You have to make sure you can keep up with the emotional demand, so be prepared for the stress that it involves. There are also financial worries, even if the rent you're bringing in exceeds the mortgage on the property. Unforeseen costs can crop up, such as maintenance and compliance issues.”
From these sort of figures it's clear that buying-to-let, like stepping out on any new career, still requires a thorough examination of your personal finances. Rental income needs to outstrip mortgage interest payments by between 25 and 50% because if there is a gap in the rental period you will have to stump up yourself. Could you afford to pay both the loan on an investment property and the mortgage on your own house if you had no rent coming in?
While buying-to-let is clearly a viable business opportunity don't rush into a rental property and end up overstretching your finances, because the returns may not be as much as you think.
Tips for property development success
It's an uncertain time in the housing market with many experts at odds over what the future holds. But if you do decide to take the property plunge it might be worth remembering these key tips.
- Rent and sell – it is important to buy a property that is suitable for both resell and rental, so as to maximise your opportunity for profit. The two markets do not necessarily go in the same directions; often as one declines the other will pick up.
- Location, location, location – even in bad markets the properties with the best locations sell well, so look for good access to transport even in the cheapest of areas. However it is important to remember different people value location in different ways so, for example, young professionals want to get into town quickly but families with children tend to avoid living by main roads.
- Flexibility – make sure your finance package allows you to change your payments if your property takes longer to sell or let than expected. This will help ensure you don't find them stretched too far.
- Talk to local estate agents – to get an idea of what buyers in the area are looking for.
- Don't rush – take your time to get to know the market and the area. Don't let estate agents push you for fear of missing out on a good deal or over worries that prices will go even higher.
- Get moving – however when you've found the property you think has potential don't hang around. Find a conveyancer who can turn things around as quick as possible. It may be more cost effective to employ people to do the work for you. Even if you have excellent DIY skills, the sooner the property is finished, the sooner you can make a return on your investment.
- Renovate – budding Lawrence Llewellyn-Bowens will just have to keep their creative urges in check because the way to decorate a house so it will sell will not necessarily be one that matches your own personal tastes. Neutral colours and plain decoration throughout tends to get the best results.
- Don't get carried away – decide on how much you want to spend and then stick to it. How many property programmes have you seen where they go wildly over budget? Well – learn from it!