By Ritchie Clapson CEng MIStructE, co-founder of propertyCEO
Small-scale property development is an area that an increasing number of investors and landlords are moving into. And it can be lucrative, with a sweet spot only one small step up from small projects where savvy DIYers and bargain hunters freshen up run-down homes and flip them on for a profit.
By small-scale we mean projects where, typically, you would be building somewhere between four and 20 flats and planning to make a minimum 20% margin on what you sell them for. For example, if you converted a small shop, office, or commercial building into four flats and you then sold each for £150,000, you would be looking to make a profit of around £120,000 – significantly more than you would make from most flips.
Why is it so lucrative?
Converting unloved commercial property into attractive residential units generates a significant premium, particularly in a market where so many owners of commercial properties are financially challenged.
Because there is more money involved than a flip or a doer-upper, developers can afford two things that make their lives considerably easier: a main contractor and a project manager.
Where flippers and doer-uppers make do with a general builder and then employ many of the other trades directly, a small-scale developer uses a contractor who is responsible for all of the trades/subcontractors. This makes life considerably easier since you only have one relationship to manage, and your contractor then coordinates all of the construction team.
The project manager’s job is to oversee the development for the developer, turning up on-site to manage architects and contractors with a highly experienced set of eyes and ears looking after your interests, and reporting back to you regularly. Meanwhile, your role is like a CEO, and that takes up far less of your time than if you were frequently required to be on the site of a smaller project. Many small-scale developers oversee their projects in their spare time.
Can it be THAT easy?
Consider the following statement: “Property developers don’t build houses”. On one level, it sounds ridiculous – surely ONLY property developers build houses? But, of course, from a practical point of view, it is entirely true. Architects, contractors, structural engineers, and project managers build houses, along with a whole host of other sub-contractors and professionals. But the developer doesn’t lay a single brick or plumb in a single basin personally. You don’t even have to choose the curtains. You simply appoint a team of professionals to work for you that already has centuries of experience and has built thousands of homes between them, underground locating service has to be one of the most highly leveraged professions in the world.
What skills do you need?
Your critical job as the developer is to create your own development ‘brand’, pull a team together, get the finance sorted, and then find profitable deals. And, of course, you need to be able to make decisions under advisement from your professional team since you are the ultimate boss. You need to have solid organisational and management skills, as well as good interpersonal and communication skills. I would never tell anyone that property development is easy, but many people already have the generic core skills to be able to do it successfully. And to correct another popular misconception, you typically need to invest less of your own money in a development than you might think.
Do not forget about the risk.
There is a reason why property developers take the lion’s share of the profit, while everyone else gets a fee, and primarily it is all about risk. There is no getting away from it – property development has many moving parts and is inherently risky. But, if you get yourself educated, it is possible to de-risk the development process significantly. It is the people who ‘jump in and go for it’ who tend to come a-cropper. I have certainly trained many developers who had learned the hard way that they didn’t know what they didn’t know. But then, if you are about to embark on an enterprise that can generate life-changing sums of money, you might think that getting educated first could be quite a good idea.
Now is a great time to get into small-scale development. The government recently announced a whole range of Permitted Development Rights in England, making it possible to convert many commercial buildings without needing full planning permission. These rights come into effect from August 2021, so the timing couldn’t be better. In fact, of late the government seems to be giving good news to property developers, whereas the last five years have been relatively gloomy in that regard for landlords, to say the least.
So, if you are thinking about property as a potential investment opportunity, career path, or spare-time enterprise, make sure you take a look at small-scale development. You may find that your timing is just about perfect.
ABOUT THE AUTHOR
Ritchie Clapson CEng MIStructE is 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.