So you’re itching to get into property development and become one of the 2.5 million+ UK property investors and grab a share of the sector that has been a reliable investment technique for the past two decades.
The excitement for first-time property developers is no surprise – the demand from potential homeowners and hungry property investors has long outstripped supply, and there are two very distinct inducements to the motivated entrepreneur:
- Appreciation of capital: property holdings rise in value as time passes. This means that, down the line, you can sell some (or all) of your properties to make a substantial profit.
- Generation of income: if you hold onto your property you can rent it out to tenants, gaining a regular income to keep you going.
There are 5 property development strategies that our clients commonly pursue:
1. Buying residential property to renovate to either sell or rent out
Prospective property developers can never resist an opportunity to buy an out-of-date, run-down house or flat that could be swiftly fixed up and given a makeover. Residential property is a great place to start for the newbie developer. Your existing home-buying and DIY/renovation experience can be great assets and you don’t need specialist knowledge of commercial properties, offices, student lets or storage units.
- Have a profit margin planned – 20%+ for a fix-and-flip.
- If the profit margin isn’t good enough, walk away.
- If an opportunity is obvious to you, the same will be true for others like mum-and-dad doer-uppers, and the competition will push prices higher.
- Remember that your purchase price dictates the potential profit. You have control over how much you pay, but the market decides how much you sell for.
If you’re a first-time developer, remember
- There is a ‘ceiling value’ for every property. This is the maximum that property will sell for.
- No matter how high-end you go with the renovation, you will never push the price above that ceiling.
- Everyone knows the ‘worst-house-in-the-best-street’ rule – try finding the next best street. The area that has potential.
- Listen to the advice of estate agents. Creating open-plan spaces may add more value than building an extension, for example.
- Be clear about your plans for the property from the outset. Buy-to-sell or buy-to-let?
Renting out the property
If you plan to hold onto the property, and it isn’t in need of major structural work, you’ll want a buy-to-let mortgage to make the purchase. Your development choices will be dictated by the locality of the property and your projected rental income. How many bedrooms does the property have? Would the property be most appealing to families, students, young professionals, or perhaps someone else?
This is the favoured option for most first-time property developers. It involves a single contract with a lone tenant, a couple or a family.
- Monthly rental income will pay for the buy-to-let mortgage and any additional management/maintenance costs, with the remaining money going into your pocket.
- There is only one tenant relationship to manage, keeping management costs down and maximising the chances that they will stay for a long time.
- There is a risk of void periods where there is no tenants and, consequently, no income – this can decimate your annual profitability, so you must plan for it.
House of multiple occupancy (HMO)
This arrangement involves letting out individual rooms in a house where the occupants share use of the bathroom, kitchen and living room.
- Multiple individual tenancy agreements.
- Potential for far greater monthly rental income.
- However, management and maintenance costs are higher.
- A large HMO with 5+ tenants can offer even greater profitability, but management responsibilities are even more extensive.
- An HMO or Large HMO will keep generating rental income even if not every room is occupied.
- Arranging repairs and upgrades when necessary can be complex.
Learn more: HMO mortgages
Selling the renovated property
A long-term mortgage isn’t appropriate if you plan to sell the property once it has been renovated. This is because you would have to exit the mortgage early, which would likely incur early repayment charges (ERCs) that could cancel out any profit from the sale.
As such, you’ll need to seek out a buy to sell mortgage or other short-term funding option. A bridging loan, or bridge finance, is a popular option since it can be repaid any time without incurring penalties.
Getting funding for residential renovation
To be a successful developer, you must focus on getting the borrowing right as much as your renovation works. Many high street lenders will not offer a good development finance option for this type of project. Anything you could get from them would come with a high interest rate and won’t offer the flexible criteria you would get from more specialist lenders.
An experienced property development finance broker like Think Plutus will be able to identify the right finance option for your plans. We will search the full market of finance products, including those that are not available to the general public, in order to find the most suitable deal with the best possible rates.
2. Buying a brownfield site or commercial property to convert into residential
Any kind of building that is currently used, or was once used, for business purposes is commercial property. This means anything from shops to office spaces or even factories.
Converting a brownfield site or commercial property to residential has been something that both central and local government have encouraged for some time, particularly with property that has been vacant for some time. As such, you may not have to jump through too many hoops to get planning permission for this type of conversion.
Converting commercial property or a brownfield site to residential is an exciting opportunity for developers since the larger buildings have the potential to create a larger number of residential units. For example, a brownfield site like a disused factory that you acquire for £1.0M may have the potential to be converted into 10 residential dwellings that sell for £300,000 each.
With a larger number of units, lenders also have greater security that can be leveraged to get the very best finance deals.
3. Building commercial premises or a second home on your property
If you have enough land on your current property, it may be possible to have another property constructed on your land, through a self build. This could be another residence or a commercial space for a business to use. Subdividing in this way shouldn’t reduce the value of your existing home excessively if your garden is larger-than-average (generally speaking, this means a garden that is 3x the size of your home).
This type of development offers fantastic advantages
- You can save a huge amount of money (up to £200,000 or more) by not having to purchase land. Instead, this money can be spent on the development.
- You may also be able to avoid the expenses of connecting certain services to the new property, since there will be no need for utility companies to dig up roads to access gas and water pipes.
Aside from having to own the necessary land, the biggest variable that impacts the viability of this option is securing planning permission. You should also seek advice from an experienced property solicitor regarding any existing covenants on your current home.
4. Buy land to build a house or development
This is the big prize for the most ambitious property developers: an empty plot of land that could contain a couple of executive homes or even a small apartment block. The profit potential of these opportunities is mouthwatering.
If you’re a first-time developer, this would be an ambitious first project. There is potential for gains, but also a high level of risk. Lenders will be cautious about approving a first-time developer with an eye on this type of project.
There are key criteria that should be ticked off to ensure this type of project isn’t a non-starter that ends up laying dormant behind a hoarding for several years.
- Having a stake: it won’t be enough to have discovered an opportunity if the lender has to bear all the risk. They will want you to put down money too.
- If you already own the land, you may be able to borrow 100% of the cost of building.
- The loan-to-value (LTV) required on the projected gross development value (GDV) will be a key factor.
- Most lenders will offer a maximum LTV of 65% for a first-time buyer. Occasionally, they will offer more, if other factors work in your favour.
Buy Land with planning permission or without it?
- Speculatively buying land without any planning permission in place is a risky move, no matter how much research you’ve carried out with the local planning authority.
- The list of lenders that will join you in the period of waiting for planning permission is very short.
- Land with planning permission already granted will cost you more, but that price is usually worthwhile for the benefit of having access to more development finance options.
Once designs are complete and planning permission has been granted, the next factor that will have the biggest impact on the cost of your development finance is the build time.
- If you are inexperienced in construction project management, recruit an experienced project manager onto your team.
- Hands-on coordination of the build schedule and the contractors will save a lot of money but only if you know how to do it efficiently.
The finance arrangements for this situation are complex so it is best to speak with a specialist adviser like Think Plutus to ensure you make all the right choices.
5. Buying land to secure planning permission and sell for profit to another developer
This is a bold approach where the potential returns are high but so, too, is the risk. The potential for substantial capital gains comes from the many developers who have an ongoing pursuit of land with planning permission that they can start construction on down the line.
Things to watch out for:
- It is possible to make enquiries about whether planning would be granted before you purchase a plot of land, but the current owner will be notified of your intentions.
- Once you have secured a plot of land, you should be prepared for the planning application process to take many months before being approved – sometimes even years. During this time, you will have to keep up with payments for the finance of your purchase.
- Different local authorities have different attitudes about granting planning permission. Their willingness to consent is often influenced by things like local politics, plans for localities and regions and established development priorities.
Your success will depend on:
- Knowledge of the area – you need to be able to identify opportunities and motivate the existing landowner to sell.
- A comprehensive understanding of the planning process.
- The patience to sit tight and seize your significant profit potential when the right time comes.
Seek out the appropriate finance partner for your property development journey
One of the fundamental factors that will dictate your success is the speed, cost and flexibility of the property development finance you obtain.
- First-time developers will always have to pay more for finance than those with more experience. Lenders are understandably cautious with people who don’t have a proven record of success.
- The aim of your first project is to stay on top of costs and timeframes and achieve a reasonable profit that will enable you to access cheaper finance for your next project.
- Think Plutus can finesse your finance application and find the best possible deals tailored to your circumstances from the full market of finance products.
How to get into property development with no money
Before the global financial crash there were many lenders granting 100% mortgages to developers. As we know, that had disastrous consequences for economies all over the world, and today 100% borrowing has pretty much ceased to exist. There are, however, various options for people looking to purchase property for development with no money and without having a deposit to put down.
Let’s take a look at some of the methods you can use to launch your property development venture if you don’t currently have the funds to make up a deposit. There are 5 proven routes to achieve this.
1. Release equity from your home
If you have money tied up in your home and not a lot of cash to hand, you can take out a secured loan or remortgage to release equity. This would provide the cash you need to start investing in property development, and it could be with you in a matter of weeks.
If you have this option available to you then it is a very good one. It can be processed quickly and can unlock a lot of money, but there are some things you should bear in mind as well:
Your property investment venture may not be a success. Would you be able to pay off the debt you took on to fund the venture, or would your home be at risk?
The property you invest in will essentially be 100% funded by debt, which puts you in a vulnerable position. However, as you’re looking to invest with no money, there really is no other option.
You would have to give some consideration to your likelihood of being approved for a residential mortgage. Lenders will assess your affordability on the basis of your current income, so speculative income from a future development is unlikely to be considered.
If you already have a portfolio of properties, you could release equity from one or many of them, which is usually preferable to putting your own home at risk.
2. Provide additional security
There are still lenders out there who are willing to consider 100% borrowing if you are able to offer additional security. This security will most often be another property which the lender can take possession of in the event that you fail to make your repayments. By offering additional security, the overall loan-to-value (taking both properties into account) reaches a level that the lender considers acceptable.
If you choose this option, the lender will take a charge over both properties and release the full amount you need to buy the new property for development.
3. Joint ventures
Property development as a joint venture is big business. The process is straightforward enough: you find a property development opportunity with great potential and perform comprehensive research of the project. You then seek out a partner to provide the deposit for the purchase (along with any other security required by the lender).
The purpose of this arrangement is that one partner plans and manages the project, doing all the hard work and seeing it through to completion, while the other partner provides the means to complete the project. As with any business partnership, both parties must live up to their end of the deal fully – simply finding a great deal will not be enough.
By entering a partnership, it’s a win-win for both parties, as they will each take a share of the profits when the project is complete. One person makes a significant profit without doing much work at all, whilst the other makes a big profit without taking any financial risk.
4. Buy under value and renovate
Before the crash, the 100% mortgages lenders approved were usually spent on buying properties at their full market value with no need to put forward a deposit or any other security. Though this is not possible in the modern market, it is possible to find lenders who may consider an application if you have found a genuine property bargain.
The key distinction in this case is between the current purchase price and the actual market value of the property (what it should be worth). If you’re buying a property for significantly less than its true market value, some lenders will be willing to consider your loan-to-value against the true market value rather than the price you are paying.
This means there may be potential to buy the property without having to offer up a deposit. This situation is not common, however, as you would usually need to find a situation where the purchase price is no more than 70% of the true market value.
5. Buy a property with a very short lease
When the lease on a leasehold property expires, ownership of the land and everything on it returns to the freeholder. The cost of having the lease extended increases as the lease becomes shorter, so people often sell properties when they cannot afford to extend the lease. These properties are usually sold at a significant discount compared to their true market value since, with such a short lease, the value is greatly diminished.
If you can arrange for the lease to be extended upon completing the purchase of the property, you can make the value jump substantially. As a result, you can quickly accrue a large amount of equity in the property, even if you fund the purchase and the lease extension purely through debt. The principle is much the same as purchasing property for less than the market value. Though 100% of the costs involved are borrowed, the lender still has a low loan-to-value by considering the property’s true market value.
Speak to an expert
If you’re looking to get into property development for the first time, expert advice and guidance can be really helpful in ensuring you make the right decisions. A mortgage broker like Think Plutus can offer insight and advice from a position of knowledge and experience, and we have access to the full market of finance products to ensure we find you the best deal. Some of the products we have access to are not available by approaching lenders directly, meaning there’s an even greater likelihood of us finding you the right deal.
As a first-timer, you are not blessed with the experience of a seasoned developer. Though you are learning the ropes, you are still putting your finances at stake so it’s important to make the right calls. Don’t leave it to chance – get the benefit of having expertise in your corner to ensure the finance – one of the fundamental factors that will determine success or failure – is done right.
To start your property development venture off on the right foot, Think Plutus, and get in touch today.