Fabled by widely adored television programmes, property development has become the desired career for many.
However, property development does not involve profit for everyone. It is important to complete your research and make informed choices along the way.
Deciding on Buy-to-Let or Buy-to-Sell
Property developers must decide if they want to place a property on the rental market or build/renovate somewhere and then sell it on.
The buy-to-let option enables you to make a monthly income from tenants or a business. Plus, buy-to-let mortgages are relatively easy to establish if you can place a 25% deposit.
Before-tax is taken into account; the vast majority of English landlords earn an annual income of £15,000.
However, it is important to note that as a landlord you are still in charge of the maintenance of the property including any repairs needed and you will need to keep up with any inspections required by law.
You can choose to use a letting agency, but this will involve a cut to profits. Keeping tenants is a responsibility.
Or you can choose to go down the buy-to-sell route which involves buying the property, doing any repairs and renovations and then selling it on to make a profit.
This practice is also known as property flipping.
The more work involved, the larger the risk and the larger the potential profit.
This can be risky as losses can be made as quickly as profit. Developing property involves many twists and turns.
Everything from inclement weather to the supplier sending the inappropriate materials may dent profit.
Property developers need to work out a detailed plan before beginning any projects.
Picking How To Operate
Before starting as a property developer, is it important to establish how you will operate your property development business.
You can buy property personally as a sole trader or by setting up a limited company.
Choosing one is not easy, especially as there are tax implications with both.
Operating as a limited company is beneficial as you can offset any interest charges with rental or property income.
Additionally, corporation tax is the only tax you will need to pay, which is significantly less than for privately owned properties.
But, withdrawing income as a limited company may incur more tax. Operating an individual will involve fewer taxes overall.
Making A Purchase at the Best Price
To generate profit, you need to sell for more than you bought the development property for.
The industry standard advises that you produce a 30% return on investment as a minimum.
Highlighting the importance of buying the property at the lowest price you can.
Especially as whilst the project is ongoing, the return on investment should be as well as any renovation, purchase and resell charges.
Property developers should consider buying at auction, negotiating with the seller or acquiring a plot with existing planning permissions.
Auctions can be a fantastic place to grab a great deal, and you can often access properties that are not for sale on the open market.
Just make sure you do your research.
Calculating Potential Profit
In industry, potential profit is calculated using three different metrics:
Profit on Gross Development Value (GDV)
This figure is the total revenue you expect to get on a project before any costs.
It is demonstrated as a percentage and additionally is fairly universally used by property developers.
For example, if you completely renovate two houses and they sell for half a million each, your gross development value is £1m.
Hypothetically, if you generated £200k from the project, the GDV on the project would be 20% (£200,000/£1,000,000).
As standard, in the industry, it advised that property developers should make 25% on Profit on GDV.
Unfortunately, it would be advisable to reassess this project, as based on this assessment, you would not be able to make the required profit.
Profit on Cost
With this metric, profitability is compared to the total development costs. Not too dissimilar to GDV it is also expressed as a percentage.
The calculation involves the gross profit and dividing it with the full development costs.
It is the same as with GDV, but it involves the total development costs.
Some developers favour this metric to calculate their target return but are just a matter of preference if you have collated the right information.
It is commonly utilised by planning authorities.
Internal Rate of Return (IRR)
The IRR is the value a development project makes whilst you the property developer is in charge of it or owns it.
Expressed as a percentage, the IRR is the percentage interest you can generate on the back of every pound invested by the developer across the whole holding period.
Due to the fact time is integrated into the equation, you can investigate the success of a project more deeply.
Using the other calculations, two projects that are the same would score the same even if one took months to complete whilst the other took years, deeming them both as profitable as the other.
With IRR, you can analyse how profit was made over a timeframe.
Buy-To-let Return on Investment
If you decide not to sell the property on, calculating return on that investment is a little more complex.
You will initially have to calculate the total yearly rent (yearly mortgages minus yearly rent) and then divide that by the purchase price.
To express this figure as a percentage, you must times it by one hundred.
Buying the Right Property
Identifying the Ultimate Location
More than the title of one of the UK’s favourite property programmes – Location, Location, Location – is also an extremely important mantra for property developers.
Informed property buyers who identify the ideal areas will have their hands on the most valuable property. Additionally, these properties will depreciate much more slowly.
The mantra is simple, yes. However, it is pertinent to have a deepened understanding of what it means.
As part of your research, you should work out what is known as the ceiling and floor price for the kind of property you are looking for.
Set by the government, these are control property prices. The ceiling is the highest, and the floor is the minimum.
How Central Is The Location?
Property price is subject to where you decide to live in a city or town.
Land is a limited commodity. In highly developed cities like London, that do not have much space for growth, usually have higher prices compared to locations that have space to expand in to.
When a city’s population leave, the outlying areas are the most affected by declining property value.
This relationship between property prices and location has a major impact on supply and demand.
Ultimately, the areas of a city or town you like are up to personal taste. Nevertheless, there is a science to what makes a good area.
Key elements include access to transport links, overall look and amenities.
The location which you plan to build in may impact the size of the plot of land.
To gauge how much these factors will add to a property, you should try and envision the life of a potential resident in the finished property.
They will most likely need to commute into work, and transport links nearby will make this a load easier.
Transport links make hot property!
It is human nature that your hypothetical resident will want to live in an attractive area with big green spaces and premier landscaping, for example.
The rate of market turnover is a great measure of an area’s desirability.
A good local area should also have plenty of essential local amenities like supermarkets, restaurants and cafés.
The majority of people favour going to businesses that are easy to get to and close-by. It is important to remember schools too.
Catchment areas are a massive factor for families. In fact, according to the Department for
Education, being the vicinity of a London top 10% primary school brings up a property’s value by £38,000. This figure is £18,600 across the rest of England.
Lastly, many want to safe where they live. Areas with low crime rates and an inviting atmosphere are where most people want to reside.
Future Developments In The Area
Property developers should look to the future, and consider what is planned for the area in the years ahead.
Schedules for new schools, hospitals and public transport infrastructure can increase property value and make the area more attractive to prospective residents.
It would be best if you contemplated where exactly the plot or property is exactly.
A property developer needs to consider how far away it is from any busy roads or motorways, as these properties will sell for less.
Some potential buyers may be put off properties near a local shop because it will probably generate parked cars and extra traffic.
Property developers cannot be dismissive about the property itself.
Generally, properties that need the most redevelopment and repairs are the better investment.
This is because a property is a depreciating asset, whilst the plot’s value will remain relative to the property.