The property development industry has always been very lucrative. Investors in the UK and other parts of the world are currently looking for ways to break into the market to earn a significant income. Research by Savills shows that houses’ prices in the UK are expected to rise by 13.1% over the next five years.
This will be an opportunity for anyone looking for a solid long-term investment opportunity capable of creating a stream of significant income. Although the property development business can be difficult to venture into as a beginner, it is not outside your grasp if you have the correct information.
In this article, we’ve provided a useful guide on how you can become a property developer as a beginner. You’ll also have access to other relevant information that can make you succeed in your newfound career path.
How to start a property development company
Starting a property development company is not an easy task. You need to weigh your options very carefully to ensure that mistakes are avoided. As a beginner, you need to prepare yourself to work very hard and be patient as it may take a while before you can build your portfolio and reach the top of your game.
However, if you’ve decided start a property development company, here is a guide that will help you.
Choosing the right company structure
When starting a new property development company, it is important that you think about the structure the company will take. It would help if you asked yourself specific questions on how you wish the business to run. The plans on the ground and your finances are factors that can influence your choice. You can decide to start either as a sole trader, a business partner, or a limited company.
Sole trader: This is referred to as a one-man business as you’ll be solely responsible for running the company yourself. This doesn’t mean that you can’t employ anyone else. But you’ll have to bear all the expenses as well as profits or losses. A sole trader means that the business and the person are considered the same entity, meaning if your business runs into trouble, you will personally be liable.
Partnership: A partnership company involves two or more people forming the business. All the partners involved share the responsibility for the smooth running of the company. The partners will also share both the profits and losses experienced in the business. This type of business is more structured than the sole trader as certain agreements need to be reached between the partners about running the business.
Limited company: A limited company is a more structured type of company involving a group of shareholders to start the property development company. There is a legal structure that ensures the liability of each stakeholder is limited.
Pros and cons
Starting your property development company comes with both advantages and disadvantages. You need to weigh your options properly before you make up your mind to know if you’re going in for it or not. To help with your decision, here are some pros and cons of starting a property development company.
- It is flexible
- It is scalable
- It doesn’t require much start-up capital
- You gain exposure
- It adds to your experience
- It has the potential of yielding profit in a short time
- It is both a short-term and long-term business
- It can be another means of making income for you
- Cash flow can be slow as projects take time
- The tax rate is relatively high even for a sole trader
- Competition can be high in some areas, squeezing your profits
- Your finances are heavily reliant on the business
Producing a business plan
A business will struggle to succeed when there is no proper plan. This is why producing a business plan should be one of the first steps when starting your property development company. Researching the market thoroughly is key.
You need to know your target market and what type of properties they will likely want. You should also consider how you intend to get the funds to start and maintain the business. However, in if you’ve never produced a business plan before, it is advisable to employ the service of a business plan expert.
How to choose what type of project you want to focus on
The next step is to decide on the type of project you wish to focus on. You must do proper research and choose which business approach will best suit your objectives. Here are some options you can choose from.
Building to sell vs building to rent
These are two property development business models that are profitable. However, you need to decide which of the two to go with.
Building to sell: The building-to-sell business model will allow you to build one or more properties to sell. Once you’ve successfully built a particular property, you will then look to sell for profit. You may also decide to buy a low-quality property while refurbishing it to a high standard to sell for profit. These approaches produce returns to you through capital gain – selling for more than it cost you to build. When using this approach, many developers refinance from property development finance onto development exit finance to reduce their interest costs.
Building to rent: This business model allows you to build a property with the aim of renting it out. Building-to-rent helps in creating a long-term income stream. Depending on the agreement with the tenant, you’d receive a set, regular income from your property. However, with this business model, you have to ensure that the property is adequately maintained so that it can retain its value. This approach produces longer term returns, but makes it more difficult to find the funds required to move on to your next project.
Ground up development
Ground-up development is the development of a property from scratch. You can start developing the property by tearing down an existing structure and building a new one. You can also start by developing on land.
This is regarded as true property development. It involves many complexities and is regarded as a very risky investment plan for those who are new to property development. Also, the ground-up development business model is not an easy way to make a quick income, with projects taking a long time to complete.
Converting an existing property
This property development business model involves you converting a property to serve a different function from what it was originally created for.
For instance, you could purchase a commercial property, and then convert it into a residential property, or even flats. This is often a very profitable approach due to the upward pressure on residential property prices, and reducing demand for commercial space. It is often also simpler to implement as the basic structure is already in place.
Splitting a house into flats or an HMO
Another property development strategy is splitting a house into flats or an HMO. House in Multiple Occupation which is commonly referred to as HMO is a property that is rented by multiple tenants who aren’t part of the same family or household. This is lucrative because the developer will collect multiple rents on the same property from the different tenants. This can provide very strong yields to the property developer.
Splitting a house into flats is also similar to converting a house into a HMO. This will allow you to divide the property into different apartments, which can be rented out to different tenants. This can also provide a very strong rental yield.
Property refurbishment is simply the practice renovating old properties. Property refurbishment involves buying a property at a low price and selling it for a higher one. In order to achieve this, developers make the property more appealing to potential buyers by improving it. That may be achieved by simply redecorating the property, or could involve extending, or even changing the layout.
Before you refurbish a property, it is important that you know the likely cost it will take and how much you hope to sell the property. This way, you’ll be sure to make a profit when you decide to sell the property.
Understanding your financials
Once you’ve created a business model for your property development company, the next stage of your journey is understanding your financials. It is important that you have a strategy in place to ensure that you make the required profit from any potential project.
Calculating your ROI/Rental yield
Return on investment (ROI) is vital in any business. This is one of the most important ways you can determine if a particular business venture has the potential to become profitable or not. There are two ways you can calculate your ROI/ rental yield.
Buy-to-sell ROI: You need to work out your expected ROI before you start if you wish to focus on using the buy to sell strategy to make money in property development. To calculate the buy to sell ROI, you will need to subtract the purchase price from the sale price.
For instance, if you buy a property for £100,000 and sell it for £150,000, it means you’ve made a profit of £50,000. To get the estimated ROI, you need to also remove all additional costs from the profit you made from selling the property.
Buy-to-let ROI (Rental yield): Although similar, the buy to let ROI is a bit more complex than the buy to sell ROI. The calculation is done based on the annual expected return on the property. You’ll calculate what you expect as a monthly rental return and multiply it by 12. You also need to add the maintenance expenses and other costs.
Other factors such as survey costs, agent fees, a buy-to-let mortgage cost, etc., are parts of what calculates the ROI more complicated in the real world. You can only get a clear picture of the rental value of your property after the development stage is complete.
Planning for tax
Planning ahead for you tax due is essential. There are accounting tools that can help you achieve this. You can make use of software such as QuickBooks to plan and manage your taxes. You can also employ an accountant or expert to help out with this.
Sourcing suitable property
For you to start making significant income as a property developer, you need to source for suitable properties that you can sell or rent out to make your profit. Securing the right property or land is key. Choosing the wrong property at the start will make it much harder to profit further down the line.
Make sure that you consider all the factors that can affect your project. We’ve listed four methods you can use to source the ideal property.
You can work with local agents to source suitable properties. Remember that the local agents will only only help you source projects that are currently on the open market. Some off-market opportunities may come up, but this isn’t overly common, depending on the location. Developing stronger relationships with agents may make them more likely to alert you to opportunities that aren’t yet listed.
The role of a property sourcer is similar to that of an agent. The property sourcers put together deals to sell to property developers or investors. They usually act as the middle person between you and either an agent or property owner.
Property sourcers focus on finding potentially profitable projects for investors. They are more commercially focused than agents and good ones can often secure off-market opportunities. Unlike estate agents, you will usually be expected to pay a fee to a property sourcer if they find you a suitable project.
Approaching property/land owners directly
This is one of the best methods to source for properties as a property developer. This approach often allows you to negotiate a purchase without having to compete with rival developers, meaning you’re more likely to bag a bargain. You don’t need to pay any agent fee when approaching the property or landowner yourself.
Financing your property development projects
Even with a good business plan and strategy, when there are no funds available, there is no way you secure a potential project. For this reason, a sound understanding of the finance options available is another crucial part of being a property developer.
Below are some of the most common products that you can use to finance your property development projects.
Property development finance
Property development finance is a product designed to fund the ground up development of new properties. This is type of loan that is secured against your site and funds you in two ways. The first is an amount of funds which is released upfront to help you to secure the site.
The lender will also release further funds in stages to fund your build costs, often lending 100% of your build costs and professional fees. Development finance for first time developers is a specialist area, so working with an experienced development finance broker may be wise.
A bridging loan is an alternative means for you to get finance to start your business as a property developer. It is a short-term loan you can use to use to fund property development projects. They’re not designed for ground up builds, but are regularly used for refurbishment and conversion projects. This is known as property refurbishment finance.
Bridge to let finance
Bridge to let finance is ideal for new developers to fund the initial purchase of a rental property that will ultimately be let. It is used for properties that require refurbishment or any further works to make them ready for rental.
Becoming a property developer is not as difficult as it may appear, but you must be fully prepared should you choose to go down this route. You also need to remember that property development is not a get rich quick scheme and while it often looks it from the outside, it certainly isn’t easy money. You need to work hard and be consistent for you to start seeing the expected results.
Before you start, you should carry out proper research about the market. You need to know what’s selling in your locality and who your target market is. Based on your research, develop a proper plan that will help you build a successful property development business.