By Ritchie Clapson CEng MIStructE, propertyCEO
When it comes to property development, it is fair to say that there is a broad range of dishes on the menu. And choosing the right one can often present something of a challenge, particularly for the new or inexperienced developer. So, how do you go about choosing the right development project for you?
First, let us take a look at the raw ingredients to see if we can find a recipe to tempt you.
I’ll start with an obvious first question: how hungry are you? For the ravenous, big can be beautiful, and many a head has been turned by the chunky profits that can be made from larger schemes. Of course, economies of scale also play a part: from the developer’s perspective, building a hundred units is not ten times the work of building ten, but it can produce ten times the profits, if not more. But with greater scale comes greater complexity and risk. If your project gets unexpectedly held up, then you will much prefer to be paying interest on a few hundred thousand than on tens of millions.
Small may be easier and less risky, but will it make you enough profit? This is where you need to do your own maths. You’ll be targeting a minimum of 20% of the GDV (gross development value – the amount your units will sell for) as your profit, and it will take you on average 18-24 months to complete a small-scale development end-to-end. So, as an example, if you’d like to make an average of £100k a year, you could do one project every 18 months that produces £150k in profit. That equates to a GDV of £750k, which in development terms is very small. Or you could do two even smaller schemes with a GDV of £375k apiece. Simply decide how much you want to make and work out the size of developments you will need to do. You will quickly spot that you do not need to do mega-developments to make a very decent living, but the math works equally for those aiming for more significant returns. A big attraction of property development is that what represents a small project in industry terms can be quite literally life-changing from a personal income point of view.
The next big question is what to build? Here is where you need to be thinking about reducing risk (again). Building a £1m luxury house is riskier than building five £200k flats because, if the house does not sell, then you are left paying interest on all the money you borrowed, but if just one flat does not shift, at least you will have already paid back your funders by selling the other four. Also, I would urge you to build for the ‘need’ market, rather than the ‘want’ market: this means 1 to 2-bed flats, or houses with up to 3-beds. 5-bed detached luxury houses look nice, but they are a non-essential purchase and can be more difficult to sell in a tough market.
You will also need to do your homework. Find out where the demand is in your target area and who will be buying. Downsizers? Young professionals? Families? They each have different requirements for location, transport links, local amenities, and home design, and your local estate agents will be a valuable source of guidance. Build for your customer and never for yourself, and always focus on your bottom line. You may think those gold-plated taps look amazing, but if they dent your profits, go for something plainer. After all, you will not be living there.
Risk crops up again when it comes to planning. Since planning permission will generally be required for most projects, it would be great if the English planning system was ultra-modern, well-resourced, speedy, and completely free of any doubt or subjectivity. Unfortunately, the opposite is true. Although the recent Queen’s Speech announced a draconian overhaul of all things planning-related, my preferred route is still to avoid it as much as possible. I have seen many planning applications get terminally stuck, costing their developers both time and money. Luckily, we have a weapon in our armoury that can make life a lot easier, and it is called Permitted Development Rights (PDRs).
PDRs allow us to change the use of a building without the need to apply for full planning permission, and such is the government’s frustration with the lack of homes being built currently, they have seen fit to significantly extend the PDRs available in 2021. From August, you will be able to convert a wide range of properties into residential, many for the first time, without applying for planning permission.
How far away should your development be from you? Ideally, you want it to be within an hour’s drive from home. While you will not be spending much time on-site, you will still need to do your research and due diligence before buying. Having to travel the length of the country is a bind, plus it makes for a more distant relationship with your contractor, which is a disadvantage. If you do not find a decent project within an hour’s drive, then you have not been looking properly.
What about your workload? Can you really afford to develop property full-time? Luckily, property development is one of the most highly leveraged business models there is. In fact, you do not need to lay a single brick; a team of professionals will deliver your projects for you, plus you will have a project manager to oversee everything. As the developer, your key roles are to create the ‘brand’, find a team, source development opportunities, and arrange the finance. All teachable skills and roles that most people should be comfortably able to do in their spare time. However, you will need to have a little flexibility in your working day, as there will be occasions when you need to take calls and have meetings.
The final thing you will need as a developer is an edge. Edges come in two primary flavours. The first edge involves knowing how to make more profit from an opportunity than the competition, which in turn means you can afford to pay more for it. Luckily, this is a skill that can be learned, yet it is surprising how few developers understand how to take advantage of it. The second edge involves creating an exclusive (or almost exclusive) dialogue with the vendor or their agent, which means you will have little or no competition. Again, the secrets behind this are eminently learnable for the novice developer. And if you can find both edges in one project, then you are doing very well indeed.
So, now you have some thoughts on what to look out for. You will have spotted that risk mitigation and getting properly educated feature quite heavily on the menu, regardless of the dish you choose. But with small-scale property development now a highly attractive alternative to the increasingly challenging buy-to-let investment model, more and more people are looking to take a seat at the table.
ABOUT THE AUTHOR
Ritchie Clapson CEng MIStructE is a veteran property developer of almost 40 years and co-founder of propertyCEO, a nationwide property development and training company that helps people create a successful property development business in their spare time. It makes use of students’ existing life skills while teaching them the property, business, and mindset knowledge they need to undertake small scale developments successfully, with the emphasis on utilising existing permitted development rights to minimize risk and maximize returns.