Here’s why small-scale property development shouldn’t scare you
By Ritchie Clapson CEng MIStructE, co-founder of propertyCEO
When most people think of property development, they don’t immediately see it as a business they could get into themselves. Buy-to-let? Well, that’s different; that’s vanilla. Everyone can do a buy-to-let. But development? That sounds like the Big Game – loads of money, but also loads of risk. Surely it’s not something for the inexperienced or faint of heart?
Truth is, the world of ‘property development’ is a broader church than many might imagine. Sure, building a new housing estate may be beyond you, but could you manage a doer-upper, finding a tired two-up-two-down and giving it a new lease of life? In fact, many buy-to-let landlords do this by default. And then there are ‘flips’ – small projects where savvy DIYers and bargain hunters freshen up run-down homes and flip them on for a profit. That doesn’t sound too daunting, does it? Nothing like the same scale as your Barratts or Persimmons. Yet, interestingly, it all falls into the category of ‘property development’.
The reality is that when it comes to being a property developer, the smaller end of the scale is a lot less scary than most people think. But here’s the thing: the absolute sweet spot in development is only one small step up from your flips and doer-uppers, and small-scale property development is an area an increasing number of investors and landlords are moving into.
What is ‘small-scale’ property development?
So what exactly do we mean when we say ‘small-scale’? Well, typically, you’d be building somewhere between four and 20 flats and planning to make a minimum 20% margin on what you sell them for. As an example, let’s assume you started small and converted a small shop, office, or commercial building into four flats, which you then sold for £150,000 each – then you would expect to make a profit of £120,000. Not a bad return, and significantly more than you’d make from most flips. And if you did 12 flats based on the same numbers, you’d make £360,000, which, let’s face it, is probably a life-changing sum for most people.
But in development terms, it’s relatively small beer. And where you’re building cheaper flats that cost only £75,000, then you’ll make half as much (or you could build twice as many) – you can do the math for wherever you live.
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. And in my 40 years’ experience, relatively few developers know how to convert properties well.
How much work is involved?
That’s all very interesting, but how much work is involved? Surely small-scale developments must be more difficult than flips if they make more profit? Well, here’s where, to a large extent, the magic happens. As we’re going up a notch in terms of scale compared to flips, so there is more money involved. And because there’s more money involved, we as developers can afford two things that make it possible for many small-scale developers to oversee their projects in their spare time.
The first thing we can do is hire a main contractor. 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.
Secondly, we can also afford to hire a Project Manager. The Project Manager’s job is to oversee the development for the developer, providing a highly experienced set of eyes and ears and managing things on site – looking after your interests and reporting back to you regularly.
But surely it can’t be that easy? Well, 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’s 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 years of experience and has built thousands of homes between them. Property development has to be one of the most highly leveraged professions in the world.
What skills do we need, then, as property developments?
So what skills do you need then, if so much of the work is outsourced? Well, 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’re the ultimate boss. It’s very much like the role of the CEO and, as such, 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.
But there’s a reason why property developers take the lion’s share of the profit while everyone else gets a fee, and it’s primarily all about risk. There’s no getting away from it – property development has many moving parts and is inherently risky. But, if you get yourself educated, it’s possible to de-risk the development process significantly. It’s the people who ‘jump in and go for it’ who tend to come a-cropper. I’ve certainly trained many developers who had learned the hard way that they didn’t know what they didn’t know. But then, if you’re 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.
Interestingly 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.
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 minimise risk and maximise returns.