How to become a property developer
Property development can be very profitable, but the first step is to understand how the various financing options work. Once you understand this you will then be able to appraise potential projects to see if they are viable for you.
There are four common approaches to property development:
- Property Refurbishment:this involves buying a property that needs work done such as refurbishment, repairs or even adding an extension and then selling it on for a profit. This route is relatively low risk, provided you do your homework on the costs involved and the potential value of the property once the work is done.
- Flipping Properties:this means buying a property at a low price and then selling it on immediately for a profit. The trick is to find properties that are selling for under their market value so having the right contacts can be key.
- Property Conversion:this involves buying a property and converting it to a new use. For example, buying a commercial property such as a block of offices and converting it into flats. In some cases, the development may be covered by permitted development rights, which means that you won’t have to apply for planning permission. Also be careful about the change of use for a property. Note: The risk of this type of development is slightly higher than for refurbishments and flipping properties but the profits can be greater too.
- Ground Up Development: building from scratch can carry the highest risks but potentially offers the greatest profits. Planning permission will usually be required and accurate costings for this type of project are essential.
Important: When considering if a project will be profitable remember to include stamp duty, legal costs, building related professional fees, estate agent fees for selling the property, and finance costs. Our stamp duty, development finance and bridging loan calculators can help you to calculate some of these costs.
Stamp Duty Calculator
Development Finance Calculator
Bridging Loan Calculator
Developing your skills as a property developer
Starting out with smaller projects will enable you to grow your knowledge and experience as a developer. Gaining experience through smaller, low risk projects will mean that learning from any mistakes won’t be so painful. This is advisable before you decide to take on any large-scale developments.
Finding the right project
Don’t be tempted to rush into a project, making sure you have found the right property is essential. No amount of hard work can make a project profitable if you have chosen the wrong property, or a property that doesn’t suit you with regards to your own talents, in the first place.
Building up your knowledge of an area, and contacts, is really important. You need to learn where to find, and recognise, properties with the right potential. So be prepared to do some leg work and visit auctions, estate agents, and speak to other developers, to help build up your own network of useful contacts.
What to look for in a development property
When weighing up the merits of a development property you will need to consider:
- How much can I afford to pay for the property or site?
- What will be the build/work costs?
- What is the likely value on completion of the project, based on similar sites in the area?
- How much demand is there for this type of development?
- What is the profile of my target buyer?
- What kind of local competition is there from similar developments?
- Are there any issues with the property or site that will impact on my plans? For example, are the drains and utility services in the right place, or will there be additional costs involved to prepare the site?
Key tips for property developers:
- If a property or site is being remarketed, try to find out why the original sale fell through – did a problem come to light that meant other potential buyers walked away?
- Is the price being asked reasonable or has it been artificially inflated by an agent, by getting developers to bid against each other? If you end up offering to pay too much then your potential profit will be hit, and you may find that your lender will no longer be willing to fund the project.
- Make sure you build in a buffer in case costs exceed your original estimate. This also allows for the final sale price being slightly lower than planned for. If you calculate your figures with no margin for error, then things can easily go badly wrong, meaning an otherwise profitable project can in fact end up costing you money in addition to all the time and effort that you would have put into it.
- Ensure that you are familiar with the local market. This includes looking at things such as; the prices for similar properties, local amenities and their impact on property prices, the speed of turnover of similar properties in the area and any local competition.
- If you are bringing in outside help, then make sure you work with trusted and reputable professionals. Do your Due Diligence by checking out their references and seeing for yourself examples of their previous work.You need to be able to trust those you are working with so time spent at the planning stage is time well spent to avoid costly mistakes.
- Once the project is underway don’t keep making changes. The cost of even small changes will soon mount up so once you have agreed the plan, stick to it!