By Ritchie Clapson CEng MIStructE, propertyCEO
For the new or inexperienced property developer, choosing the right project can often present something of a challenge. Economies of scale play a part: from the developer’s perspective, building a hundred units is not ten times the work of building ten, however it can produce ten times the profits, if not more. But with greater scale comes greater complexity and risk.
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, 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.
What should you 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.
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.
Ideally, you want your project 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.
There are risks to mitigate, but small-scale property development is now a highly attractive alternative to the increasingly challenging buy-to-let investment model.
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.