What does property development involve?
What is property development?
Property development can take many forms, but is used as a blanket term to describe ground up builds, renovations or conversions.
Why become a property developer?
The demand for new property is huge, as a country, we’re failing to hit our new home targets and the lack of supply is creating upward pressure on property prices.
There is plenty of profit to be made, and it’s not just new builds that can generate big returns – renovations and conversions can also be highly profitable.
What are the different types of property development?
There are numerous routes you can take as a property developer and each have their pros and cons. Here are four of the most common and what they entail:
‘Flipping’ is a term used when a property is purchased at a low price and then sold on for a profit almost straight away. Property flipping is popular, but finding a bargain can prove difficult unless you build a strong network of connections.
Buy a property at a good price, refurbish it, maybe even add an extension, and then sell for a profit. This is a simple method and has a lower risk of unexpected surprises than heavier developments.
Converting property, from a house into flats, or office to residential is a strong method of turning a profit from property. There is a higher potential for profit than the above options as there is more of a fundamental change to the property. Conversions can often benefit from permitted development rights, meaning no planning permission is needed.
Ground up development
Developments built from scratch are at the heavier end of property development. The potential profits can be very large as projects scale up. Obviously, the larger the development, the more room there generally is for error. Ground up development requires a lot of consideration and will generally require full planning permission before works can begin.
How do property developers fund projects?
Understanding the funding available
To become a successful property developer, you must first understand the finance options available to you. Without knowing how much money is available, you will be looking at the whole market for property deals, without knowing whether you can buy them.
By taking the time to understand your finance options upfront, you can narrow down your property search. As you become more targeted, you will find more suitable potential investments, and more of them. In addition, it’s impossible to calculate the likely profitability of a scheme without first understanding your costs.
Property development finance
Property development finance is used to fund ground up developments. These loans usually have no monthly payments as the interest is either paid upfront, or ‘rolled up’ on top of the facility.
You’re usually able to borrow a percentage of the purchase price, plus the full cost of development works.
Once the properties are built, the facility is either repaid through the sale of the properties, or refinance to a term loan or development exit finance.
These loans are often used for properties that are being developed, but not from the ground up. They are a type of short-term loan and again usually have no monthly payments, instead rolling up, or deducting the interest.
Refurbishments and conversions are usually funded through property refurbishment finance.
There are lots of types of these loans so research is key. A great starting point is our bridging loans explained page.
Joint venture development finance
JV finance, also known as 100% development finance is a type of funding available to experienced developers.
It works in the same way as traditional property development finance, but allows you to borrow the full costs of acquiring the property, plus the full development costs. The price you pay for this is a profit share. Profits are usually split on a 50/50 basis and you will be solely responsible for delivering the project, with the investor solely responsible for providing the funds needed to do so.
Find the right team to support you
Once you’re comfortable with the property and prospects on sale, the hard work really starts. If you’re not going to be doing the work yourself, you need to have a team you can trust. Organisation is key, to get accurate figures from the team you’re working with, make sure you are on top of everything. They will need accurate information in painstaking detail to give accurate figures.
Check your team out before committing, use online review websites to get a feel for their previous work. This will give an initial idea of how they operate, but it must be followed up by discussions about previous projects and ideally a visit or at least photographs of their work.
Finally, have confidence in the plan. Constantly changing designs, moving plug sockets and making ad-hoc decisions at every step of the process is prone to costly mistakes and rising costs.
Building up slowly
It is generally better to slowly build up in property development, starting with refurbishment before deciding whether to move on to conversions and ground up developments.
All projects will generally experience minor hiccups and will require changes to the plan as more information comes to light. It’s generally to familiarise yourself with these mini-crisis when the stakes are lower and the problems easier to fix.
Sourcing good opportunities
Where can I find a suitable project?
You need to have eyes and ears everywhere – the key is networking.
Of course, you can look online on the well-known property portals and auction houses, but the real gems are often hidden, or sold before they go to market.
While you’ll pick up some profitable schemes this way, you should also be looking to speak to agents about any upcoming sites/properties they have.
Property sources can also be a great source of hidden gems – you can find local and well-respected ones through LinkedIn.
Talk to agents, talk to property sourcers, talk to surveyors and any other local property professionals you can and opportunities will usually come your way.
Understanding the market that you plan on entering
To make an accurate prediction of the sale price of your project, you must understand the market you’re selling in. Knowledge of the following is essential:How much similar properties have sold for locallyAny other local planning applications that may affect the value of your projectAny features in the area that command a premiumLocal schools and their effect on sale pricesHow long properties generally take to sell in the areaThe level of demandOther housing stock that may hit the market at the same time as yours
Finding the right property
If the wrong property is chosen from the start, the scheme has a good chance of losing money, no matter how well it is carried out. You generally must kiss a lot of frogs to find the right project and the temptation can arise to try to make the property fit, even if it’s not quite right.
You should use all the tools at your disposal to find the right project, including agents, auctions, private sales websites & property sourcing agents. However, much research you do, there is no substitute for getting in at ground level and talking to people face to face.
By getting to know people, talking to other developers and anybody else that might have inside info on property bargains, you will make the opportunities come to you. When you strike up relationships and ask for help, people will tend to help and may even pass you on to their own connections.
What makes a property ‘right’?
The right property depends on many factors. The key thing is to understand the following for each potential project:What can I build on the site?How much can I afford to pay for the property/site?What are the build costs?How much have similar sites sold for once complete (also known as comparables)?How much demand is there for what I am producing?Who is my target buyer?Are there any issues with the property as it stands?If you’ll be doing ground work, where are the drains and services?If planning to build up, will the existing foundations be fit for purpose?Are there other schemes locally that will hit the market and potentially reduce demand? If yes, how do they compare in quality and price?
Top tips when taking on your first development
Don’t get involved in bidding wars
Some estate agents are excellent, they take a consultative approach and ensure a deal that works for all parties can be agreed. Others will send the potential project to every developer they know to encourage a bidding war.
This generally doesn’t go too well as a developer will win the bidding by offering too much for the property. During further due diligence, either they, or their potential lender will generally notice that there is no money to be made at that price. The buyer then pulls out and the property is remarketed using the same approach.
Where projects are continuously remarketed, bidding wars encouraged and prices prohibitively high, it is often better to walk away. It’s easy to be caught up in the bidding, thinking that if others are bidding high, it must be worth it.
If you purchase a potential project that is being remarketed, be sure to find out why the last buyer pulled out before agreeing the purchase. There may be something that you don’t know about that affects the deal.
Understanding your total costs
The only way to make a profit from property is simple. The figure you sell for must be higher than the cost of acquisition, works and any costs on sale. This might seem very straightforward, but we have worked with countless investors who have underestimated their costs, overestimated sale prices or left no room for error.
Without a detailed breakdown on costs, a buffer for unexpected costs and detailed comparable sale prices, you are doomed to fail. Excess cost in one area simply won’t be absorbed in another.