When it comes to property development, it’s fair to you have a wide selection of dishes on the menu.
Deciding which one is right for you can be a challenge, particularly for the new or inexperienced developer. Let me share some ideas on how you can choose the right development project for you.
An important initial question
Let me start with an obvious question; just how hungry are you? For the ravenously hungry, 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 their 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, or more. But greater scale comes with greater complexity and risk. If your project gets unexpectedly held up, then you’ll prefer to be paying interest on a few hundred thousand rather than on millions.
Small may be easier and less risky, but will it make you enough profit? Here’s 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’ll need to do. You’ll quickly spot that you don’t 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.
Deciding what to build
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 it doesn’t sell, then you’re left paying interest on all the money you borrowed. But if the last flat doesn’t shift, you’ll have already sold the other four and will have paid back your funders. Also, I’d urge you to build for the ‘need’ market, rather than the ‘want’ market (I’m talking 1 to 2-bed flats or houses with up to 3-beds). 5-bed detached luxury houses look nice, but they’re a non-essential purchase and can be more difficult to sell in a tough market.
Doing your homework
You’ll 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 won’t be living there.
Navigating planning
Risk crops up again when it comes to planning. Since planning permission will generally be required for most projects, wouldn’t it 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 government has announced a draconian overhaul of all things planning-related, my preferred route is still to avoid it as much as possible. I’ve 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’s 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’ve seen fit to significantly extend the PDRs available in 2021. From August, you’ll be able to convert a wide range of properties into residential, many for the first time, without applying for planning permission.
Consider your circumstances
How far away should your development be from you? Ideally, you want it to be within an hour’s drive from home. While you won’t be spending much time on-site, you’ll 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.
How is your current workload? After all, you’re unlikely to move into develop property full-time right away. Fortunately, property development is one of the most highly leveraged business models. In fact, you won’t need to lay a single brick; a team of professionals will deliver your projects for you, plus you’ll 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.
These are all skill you can learn and roles that most people should be able to do in their spare time quite comfortably. However, you will need to have a little flexibility, as there will be times when you need to have meetings or take calls.
Finally, you’ll need an edge. These come in two primary flavours and are eminently learnable. The first involves knowing how to make more profit from an opportunity than your competition (which of course, means you can afford to pay more for it). This skill can be learned, yet it’s surprising how few developers understand how to take advantage of it.
The second edge requires creating an exclusive (or almost exclusive) dialogue with the vendor or his/her agent, so that you’ll have very little or no competition. If you are able to find both edges in one project, you’ll be doing very well.
Ritchie Clapson is a veteran property developer and co-founder of propertyCEO
