Property development often comes across as a lucrative and relatively straightforward way to earn a living. Yet in reality, it can be stressful and complex to navigate – particularly if you’re just starting out.
Here, we take a look at how and what it takes to get started in property development, so that you can make an informed decision about whether it’s right for you.
Consider what type of property investor you want to be
You’ll need to decide what type of property developer you want to be. The traditional option is to buy, develop and then lease out the property but being a landlord comes with its own complications and responsibilities.
Alternatively, the trend for house flipping – buying, modernising and then selling in a short time frame, suits investors who don’t want long-term landlord commitments.
You may decide a combination of the two gives you the most security as the income from rent can help fund a property flipping project.
Whichever you choose, you’ll also need to decide how you’ll structure your activities. Whether that’s as a sole trader, with a business partner or as a limited company, it’s important to consider all the options. Each comes with their own set of pros and cons. For example, whilst a limited company structure means you can minimise your Income Tax and National Insurance contribution, you’ll pay corporation tax instead.
Property development is expensive, and you’ll have to consider more than just the initial property cost. Don’t forget to factor in aspects such as:
Stamp Duty Land Tax
Estate agent fees
Repairs and construction costs
Interior décor costs
Needless to say, the more complex the project, the more you’ll have to budget for. It’s also sensible to have a contingency fund to cover any unexpected costs.
Funding itself can come from various sources but you’ll need to familiarise yourself with the pros and cons of each (or contact a mortgage adviser), such as (this list is not exhaustive and is for information purposes only)*:
Buy-to-let mortgage – if you want to rent the property, you’ll need this type of mortgage, but it will typically need a large deposit and fees and interest rates tend to be high as well.
Residential mortgage – suitable if you think you might live in the property yourself for a while or sell it immediately after development.
Unsecured loan – the amount you can borrow may be limited and you’ll also need to compare lenders for the best interest rate and payment terms.
Secured loan – will typically provide a larger sum of money compared to an unsecured loan but be mindful of what you’re securing it against. If you’re using your own home as security, defaulting puts this at risk.
Bridging loan – available if you only need a short-term loan while waiting for other funds (for example, if you’re in the middle of selling another property). Terms and conditions tend to be strict for bridging loans so it’s worth checking eligibility upfront.
Set out a plan
Even if events don’t quite go to plan, it’s vital to have one in the first place. Plans should take into account the entire timeline of the project from funding right through to rental or sale. Points to consider include:
End use – will you rent the property, live in it or sell it? Consider alternatives if you can’t go through with your first choice. If the plan is to rent, who is your target audience, what are the marketable local amenities, and will you use an agent or market and rent it yourself?
Time frame – how long have you got to complete the project? What are the financial ramifications if you don’t finish it in time? This is where it’s important to consider what’s in your contingency fund and whether it’s enough to carry you through any worst-case scenarios.
Market changes – seasoned developers will know that a diverse property portfolio can help mitigate overall ups and downs. Consider the property market not just where you’re investing but for the country as a whole. For example, a survey by Rightmove revealed more than one third of buyers said national lockdowns had made them think carefully about their next home. Tellingly, good internet, spare rooms and a home working space are now favoured over commuting times and transport links.
All property developers no matter how experienced, will come across complications. Learning those lessons can pave the way for a smoother experience the next time. While you can learn from mistakes and problems, it’s also worth remembering to make note of what did work.
Are there opportunities for passive property investors?
Property development isn’t for everyone. Research and funding are two of the most important elements but time and money mean a hands-on approach isn’t always an option.
For property developers who are also willing to be landlords, using a management firm can remove the need to be involved but will impact earnings. Alternatively, Preference Shares offer investors a completely hands-off approach while still generating a return.
To invest you must be a High Net Worth Individual, Self-Certified, or Certified Sophisticated Investor. For more details simply register on our website.
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