Many people are interested in developing property as a way to start their own business. It is possible to become successful and make money from property development. Here we look at the things that are involved in pursuing a career in this field.
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What’s involved in entering the world of property development?
In recent years there have been a number of TV shows about property development which often have given the impression that it is a get rich quick fix. However, property development can be very demanding. It is not just a simple task, like buying cheap properties, doing them up and selling or renting them for profit or like playing a game at an Intertops mobile casino. There are risks involved, it is hard work and because of the changing housing market, it can be very stressful.
Nevertheless, starting up a property development business is not that complicated and it is open to anyone regardless of qualifications. If you are handy and enjoy DIY you can even do some of the renovating yourself. Renovating properties can offer a flexible work schedule, perhaps still holding onto your day job while renovating in the evenings and weekends.
However, once you have builders working on the premises you do need to be there as much as possible to supervise.
Alternatively, you could choose the “buy-to-let” route, avoiding renovation, and hand it to a letting agent on your behalf. Below is a guide to becoming a property developer.
How to get started in property development
First consider whether your goals are long or short term? Long term involves rental income and capital growth whereas short term is likely to involve renovation and a quick sale.
Buying a property to rent out is a long- term goal. In this way you can to develop a portfolio of properties which will give you a steady income. You can apply for “Buy to let” mortgages which are quite easy to obtain but you will need a deposit of around 25% to put down. Also remember that rental income is subject to tax.
Buying to sell is a short- term goal. The quicker you turn the property around, the quicker you make a profit. But this is subject to market conditions. If the market should fall it could leave you with very little profit, perhaps with none at all. Remember there is also the issue of capital gains tax on selling a property.
Buying personally or a via a company
This is a key question in property development and your decision will have tax considerations. It would be wise to discuss this with a financial advisor before making your choice. There are advantages to buying via a limited company verses a personal purchase, for example, taxes may be lower. It is also possible to reinvest monies in other properties and perhaps lowering your tax burden either further as you will be taxed on profits calculated at the end of the year.
Buying a property as an individual also has some benefits. Generally capital gains tax will be less for private property owners. Remortgaging on personal properties is tax free whereas taking money from a limited company owning the properties is not.
Making a profit from property development
In order to make money from your investment it is important to have a business plan and financial forecast. When buying a property to resell you should aim for around 30% return. That figure should be above any renovation, purchase or selling on costs. The amount that you make when selling should cover any costs incurred during the renovation, for instance your living expenses or salary and leave you some money to reinvest in your next project.
If you plan to rent it out, you should take into account its rental yield as a percentage. Basically, divide the total amount of rent received, less running costs like maintenance, mortgage repayments, insurance by the amount of money you invested in the property. Generally, you should be looking for a rental yield of about 7%. Rental incomes should exceed mortgage repayments by 25% which would cover maintenance and also times when the property is not rented out, maybe one month each year.
Make sure your finances are organized
In order to start in property development, you will need to have finances in place. How much, will depend on the project; the amount of work involved and how long it will take. You will need to know what your costs will be and the predicted sale or rental figure you hope to achieve when it is completed. It is wise to have a contingency of around 30% to allow for unexpected costs.
Usually, it is necessary to take out a mortgage in order to purchase the property. As mentioned above, Buy-to-let mortgages are relatively easy to get but you will need around 25% to put down.
You can find some good property bargains at auction. Generally, you will need to release the funds on a purchase within 28 days of winning the bid. Therefore, you will need to find a mortgage lender who can release the money quickly.
When looking into how you are going to finance your project, research the current situation well. Check the local market, do your research on interest rates, inflation and any other factors that may impact your investment.
Location, location, location
Location is important. An area that is on its way up is ideal. You can buy cheaper with the potential to sell at a later date and get a good return on your investment. Research the area and look for signs of regeneration. Check out the local authorities for news of local investment. Buying within easy reach of public transport, good schools and in quieter locations is preferred.
Make sure you buy your property at the right price
The standard rule is to make money when buying and not when selling. You need to pay as little as possible in order to make the most profit when selling.
It is crucial to check the local market for accurate pricing. Go online and compare similar properties that have sold. Be sure to look at rental prices for similar properties in the area and the number of rentals available on the market, too many may mean that the market is saturated and perhaps you should avoid investing.
You can find good buys at auction but beware of the excitement during the bidding as you could end up with a difficult property that will cost you dearly. Always research the property you are interested in purchasing and stick to the figure you had at the outset.
Always get a structural survey to make sure there are no hidden problems. Buying a property with few problems is worth its weight in gold. If you fail to do a survey it may end up costing you a fortune to put any problems that surface right.
If you are planning to extend the property, it is always better to get planning permission before you purchase the property. Perhaps check neighboring properties to see if they have extended.
Be clear when developing about who your target buyer or tenant is.
Property developing is a business. You need to focus on your target market. When renovating, make sure you keep your target market in mind. You are not renovating the property for your personal use. Make sure you start out with a realistic budget and stick to it. Make sure all your refurbishments meet the requirements of your target buyer or renter. Don’t cut corners or buy too cheaply. You can find good long- lasting fixtures and fittings at a reasonable price.
The outside of the property is more important that you may think. Invest some money into the exterior of the property as many people will make up their minds even before they go inside.
When organizing the layout of the house, again make sure that it meets the requirements of your target market. It is always a mistake to squeeze too many bedrooms out of a property in order to try to increase your profit. Choose your builders carefully and make sure you are there on site to supervise.
