How to become a property developer: 8 simple steps
Wondering how to build a property portfolio? Read our bite-sized guide to get your property business idea on the path to success
These are the basic steps you need to know to become a property developer we cover below:
With no one any the wiser on the UK’s fate after it leaves the EU on March 29 (if indeed it does), experts are predicting a largely static market in 2019. Sellers and buyers are holding tight in anticipation of a firmer agreement being reached.
Meanwhile, the Bank of England has said house prices could plummet by 30% on the event of a no deal Brexit.
However, there is some good news. In the 2018 Autumn budget, the Chancellor announced the extension of the Help to Buy shared equity scheme. The scheme, which sees the government lend first-time buyers 40% of the value of their home, is now due to last until 2023.
Nevertheless, despite some fluctuation and the odd crisis of confidence, the property market remains a dynamic and exciting industry to enter – with big rewards waiting for those who succeed
1. Develop a property development business plan
Even if you’re planning on starting a property development business part-time, and aren’t sure if it will become a full-time business or just an additional way to make cash, it’s still sensible to have a property development business plan. Take a look at our business plan template for some more inspiration.
It’s also important to bear resources in mind; if you are likely to require staff, then you may need to employ the help of HR agencies or payroll service providers to ensure you operate legally. Equally, if you need to promote your business, you may need to look into designing a website or running marketing campaigns. Many companies choose to outsource these processes when starting out to ensure that quality is retained at all times.
2. Buy-to-let or buy-to-sell
One of the key targets you’ll need to identify in your business plan is your exit strategy. Is your plan to buy-to-let (read more in our full guide about the buy-to-let business model) or to buy and sell?
Buy-to-let offers a more long-term strategy, and enables you to build up an extended property portfolio in order to supplement – or eventually replace – your current salary. Buy-to-let mortgages are readily available, but you need to bear in mind that HMRC views income generated from rented properties as a salary, and therefore it’s treated like income tax. If your tax is classed as ‘higher rate’, you will be taxed 40% of any earnings.
Buying and selling offers a more short-term strategy to quickly increase your capital. You are much more dependent on market conditions, and it is certainly more risky – although it does offer a more instant return-on-investment. Properties sold incur capital gains tax, which is currently between 18% and 28% dependent on income, with an annual exemption of £11,700.
3. Always consider the rental yield and return-on-investment
If you’re planning on a buy-to-let strategy, the rental yield is essential. But even if you’re hoping to sell, you have to be prepared for a volatile market; in a recession, you could get stuck with property you can’t shift.
Rental yield is calculated by measuring annual rental income against the value of the property. 10% is considered a good gross yield, and this can increase dramatically with multiple occupants (student lets for instance). When selling properties, you need to aim for a minimum of a 30% return on your capital.
4. Location, location, location
It’s arguably one of the most overused phrases in property development, but it really is all about the location. Not that you want to buy in a location that’s already deemed great (a common mistake) – you need to be able to spot an area that’s on the rise and buy early, when there’s the greatest chance of making a healthy profit. Look for areas of growth and gentrification where other developments are taking place, or are planned.
5. Don’t rush (do your research)
It’s important you don’t rush into buying a property. It can be easy to get swept away by estate agents, who insist you’ll be missing out on the best deal ever if you don’t buy ‘x’ immediately, but you need to spend adequate time getting to know the market and area. However, once you have found a suitable property in the right location, it pays to move quickly. The quicker you can turn a property around, the better – the sooner it’s finished, the sooner you can make a return on your investment.
Market research is essential to ensure you buy at a sensible price. In property development, you make more money when you buy than when you sell, so negotiate hard when it comes to the asking price. Sites such as Rightmove and Zoopla can help you compare prices in a certain area. You also need to be wary of structural issues, or other external factors – such as unruly neighbours – which could have an impact on a property’s value. Without sounding pessimistic, you need to always consider the worst case scenario; if you still think it’s a worthwhile investment, then it probably is.
6. Make sure your property is fit for purpose
Whether you’ve bought a property to sell or to rent, it’s your duty to ensure it is fit for purpose.
This means that the property must meet minimum safety and security requirements, and is – in one word – habitable.
After all, safety and security comprise the second tier of Maslow’s hierarchy of needs. Without them, your tenants can’t ascend to the third tier: belongingness and love.
Here’s what you need to make your property fit for purpose:
If opting for a buy-to-let business model, it is a landlord’s minimum responsibility to ensure the home meets basic security needs. This includes ensuring that doors and windows can be closed properly and locked.
Any additional security measures are up to you. Be aware that a more secure home is a more desirable home: prospective tenants or buyers will value features such as intruder alarms, fire alarms, and in some cases, even CCTV. Some high-value properties may even warrant a guard response system.
Another incentive for investing in security measures is that it will reduce your insurance premiums significantly. There’s actually no requirement for landlords to have insurance in place, but if you have a buy-to-let mortgage, your lender may require you to have insurance in place.
Boilers are the beating heart of a home, supplying the heat necessary for a broad spectrum of everyday functions. These include central heating, water heating (showers), and cooking.
Boilers allow us to have hot meals, keep clean, and keep warm. They come in all shapes and sizes – and not all boilers are suitable for all houses. It depends on where it will be stored, the requirements/ size of the house, and the property’s existing pipework.
7. Tailor your developments for your buyers (or renters)
It’s essential to tailor your development to the demand in the area you’re buying in (a key issue to address in your business plan). Is the local market best for students or families? Is it worth creating a very high-spec property, or will simple fittings be more suitable? It’s all too easy to go over budget creating your dream property, but you need to keep a tight grasp on your finances, and have your target buyer or renter constantly in mind.
8. Ensure you have suitable property development finance in place
Becoming a property developer requires money, and lots of it. You also need to bear in mind that until you sell your first property, your money will be tied up, leaving you unable to grow or expand.
It’s essential to ensure you’ll be able to raise the necessary finance you’ll need. Banks will have dedicated property finance experts that can advise you on available and suitable funds.
For a detailed step-by-step guide, read our comprehensive guide on how to start a property development business.
Mortgages are probably the most widely used method of raising funds to buy a house. A bank or building society lends you the value of the house, which you pay back in instalments with interest.
The mortgage market has traditionally lacked transparency and consumer focus. But a new wave of property technology (proptech) start-ups are blowing it wide open. Speak to a mortgage advisor about the best option for your development plans. You can even take out a buy to sell mortgage.
As a developer, you could also take out property development finance. This is a short-term loan that can be used for anything, from new builds or refurbishment to conversions and residential jobs.
Or, if you struggle to access a mortgage or other mainstream finance, you could be eligible for a bridging loan. This is short-term finance secured against property assets.
A good way to mitigate the risk of an expensive property project is to enter into a joint venture partnership. This involves two parties agreeing to pool their resources and share risk.
Do some research to establish which type of property finance is the most suitable for your needs.