There are many advantages to breaking into the property sector for the first time. The property market has provided consistent profits to over 2.5 million developers in the UK during the last 20 years and has supplied attractive returns on investments.
In the current property market, the demand from would-be homeowners and property investors continues to outweigh supply, opening up potential investment opportunities for experienced and new property developers. If you’re willing to take a risk and delve deeper into development, you can benefit from the urgent need for more housing and generate income from this booming sector.
If you’re looking for a way to get started in property development, we’ve compiled five tried and tested methods developers use to increase their property development profit margins.
The five most prevalent techniques to generate profits from property development are as follows:
- Purchasing a residential property to renovate: for sale or to rent
- Purchasing a commercial property with the intent of converting it into residential development
- Building a second house or commercial space on a property you already own
- Purchase land for new construction
- Purchase land to obtain planning permission, then sell it on to a developer.
Stephen Clark, from Finbri Development Finance offers this advice, “A successful development often relies on the experience of the whole team. When you’re developing for the first time it generally pays to ‘buy in’ the experience you’re missing. Having an experienced project manager and construction team on side from the outset will pay dividends and I’d suggest considering that – at least for the first couple of projects, especially where the project is a ground-up development. The alternative is to start with smaller projects, for example, simpler ‘buy, light refurb and flip’ projects, and accept that you’ll be learning along the way that may cost you some, if not all, of your profit.”
How first time developers can increase property development profit margins:
1. Purchasing a residential property to renovate: for sale or to rent
First-time property developers are frequently drawn to run-down, outdated houses and apartments that need renovation where they can easily add value, and there is typically a good amount of profit to make in a relatively short time frame. When deciding to purchase a residential property to renovate, always aim for a profit margin of at least 20% as anything below isn’t worth the effort and can leave you in negative equity.
Renovating a residential property is a great place to start if you‘re new to development as it doesn’t necessarily require professional construction-related experience within the market and is relatively easy to understand.
The profit you generate from a renovation will be determined by your initial buying price, as the market will always govern your sale price.
Top tips for first-time developers:
- Always be clear about whether you are choosing to rent (known as ‘buy to rent’) or sell your investment property (known as ‘flipping’ or ‘buy to sell’), as this can influence how much profit you make and how long it will take for you to realise a return on your investment.
- Research the market to locate up-and-coming regions so that you can identify profitable projects quickly.
- According to estate professionals, open-plan living areas may add more value than an addition.
2. Purchasing commercial property with the intent of converting it into residential
Commercial property includes any structure that is or has been utilised for commercial purposes, such as office spaces, pubs, hotels, guest houses or even warehouses.
Converting commercial property for residential use has been popular with central and local governments, particularly when the building has been empty for some time. Due to the size of the buildings involved, these conversions provide developers with tantalising prospects to produce a significantly higher number of residential apartments.
A developer may look at purchasing a disused warehouse unit for £1.5m, which could then be converted into 15 residential units worth £285,000 each, creating just over £4.25m in revenue. This level of financial security is attractive to lenders, which may help you leverage cheaper financing as you become more established in property development.
3. Constructing a second house or commercial building on land you already own
If you have the space on an existing plot, you may be able to develop an extra property on your land, such as another dwelling, an office or commercial space. If you have an above-average garden, subdividing should not considerably affect the value of your current property.
Advantages of building on your land:
- You can save on the cost of buying the land and use the money towards the development.
- When purchasing new land, utility companies usually need to dig roadways to access electricity, water, sewage and gas pipes. This can come at a considerable cost, so using land you already own will avoid the additional cost.
Having space on your land to build is an excellent way of generating profits without purchasing a property or land for development. While the renovation is generally the most straightforward path into property development, utilising your land is a steady second. With correct planning permission, you could finance a new build on your land generating a substantial profit without needing to purchase land or property.
4. Purchasing land for new development
Every developer has their sights set on vacant land that may house a modest block of flats or a couple of executive residences, with great profit possibilities.
This is an ambitious project for a first-time developer – and the lender assessing their application will perceive the development as high risk. Things to look for when purchasing land:
- If you’ve found a plot you wish to purchase, you will have to finance part of the purchase yourself.
- You may be able to finance 100% of the construction costs if you already own the land.
- Most lenders would consider a maximum of 65% LTV for a first-time developer – maybe more if everything else is in your favour.
Land with or without planning permission?
A speculative acquisition of land without planning is a significant risk, regardless of how much research you’ve done with the local planning department.
Land with planning permission is more expensive, but it is generally worth the premium price given the higher availability of development funding as most lenders will not provide financing during the application process.
Once planning permission has been authorised, the build time will have the greatest influence on the cost of your financing. If you have little or no expertise in construction project management, you will need to bring on an experienced project manager to your team. Their ability to coordinate contractors and the project timeline will compensate for the fees in cost savings and minimising budget overruns.
5. Purchasing land to obtain planning permission and then selling to a developer
This type of development is adventurous for a first-time developer as although there is a potential for huge returns, there is a high level of risk.
If you’re considering this type of property development, here are some important points to bear in mind:
If you want to inquire about probable planning permission before purchasing a plot of land, always be aware that the owner will be notified.
- Once you’ve purchased a plot of land, gaining planning clearance might take months, if not years, during which time you’ll be paying interest on your loan (or the opportunity cost of tying up that capital).
- The inclination of local governments to provide planning approval varies and is heavily impacted by local policy, local and regional plans, and agreed-upon development goals.
When purchasing land to obtain planning permission and sell to a developer, the success of the development will be governed by:
- The ability to identify possible opportunities and persuade landowners to sell.
- An in-depth comprehension of the planning process.
- The capacity to hold out and accept your potentially substantial reward later rather than sooner.
Funding for residential development projects
Successful development necessitates a focus on financing as well as construction. Finance will be more expensive for first-time developers, so it’s essential to keep costs under control and plan for construction and supplier-related issues as they can quickly eat into your profits.
Stephen from Finbri says, “Financing a development is a steep learning for first-time developers. Many will approach high-street banks and are often discouraged by their higher interest rates, not realising there are other, more specialist finance products on the market. A development broker is always a good place to start as they’ll have access to the whole market, allowing them to know which lender is currently doing deals with first timers and the lenders’ preference for different types of projects.”
Top tip for ground-up development finance for first timers
Whilst it is often difficult to obtain funding for ground-up developments for those without a proven track record of successful developments, there are a few ways to ensure you present your project in the best possible light and secure the funding you need.
A crucial part of this process is ensuring that all the information that a broker or a lender needs to assess your application is provided clearly and thoroughly. You’ll need the following:
Details of the site or property:
- The purchase price including all associated documentation
- Its open market value determined by an RICS valuer
- Full address
- A detailed breakdown of all project costs
- A complete schedule of works for the project
- This will detail the constraints and opportunities evolving from the location, legal and planning aspects of the site as well as their physical characteristics.
Planning application/permission details:
- What you intend to build
- Current planning permission
- Site plans, drawings and elevation details
- Planning permission applications and documentation
Gross Development Value details:
- Evidence of the expected end value
- If you’re a limited company then the director’s details will also be required. This includes the history of previous developments carried out, how successful they were, their CVs, and project profits from previous developments.
Who the main contractor will be & the project manager’s credentials:
- Name, address and contact details of the contractors
- Previous experience of completing similar projects
- Project manager’s contact details and their Cv or experience
- Company structure
- A completed Asset, Liability, Income and Expenditure Summary (ALIE) for the company directors or applicants involved
- A planned exit strategy for the project
Starting a conversation with a broker or lender without the above information will likely damage your credibility with them, so you must be prepared and armed with all the facts and information that demonstrates a lender’s money is safe with you.