Here’s proof that property development isn’t as hard as you think
It actually takes less work to convert offices into flats than buying a property to let – and the results can be lucrative.
By Ritchie Clapson
Although the shine has been taken off the buy-to-let model by tax hikes and regulation changes, property remains a highly attractive asset in which to invest.
And yet, while buying to let has always seemed within the realms of possibility for most of us, property development doesn’t.
But why? After all, unlike other business models, the demand for property is virtually guaranteed. They’re not making any more land, but there’s a steady flow of people who want somewhere to live, and there are not enough homes to go around.
We’ve seen house prices soar recently and they’re still rising, despite a European war, rampant inflation, and a cost-of-living crisis. We even have renters becoming first-time buy-to-let investors in order to secure a foothold on the housing ladder.
And what’s the surest way of maximising your profits from property investment in today’s market? Small-scale property development.
Why property development?
Property development has had something of a PR problem historically when compared to buy-to-let investing.
It sounds like it might be quite complicated and possibly rather risky too. It also sounds more like a job than an investment strategy. Yet, as more and more landlords are discovering, the ability to convert small commercial buildings into residential flats can be highly lucrative and allow them to build their portfolios more quickly. And it’s not as complicated or risky as many initially feared.
One of the biggest attractions of taking on smaller development projects is that, despite being small in development terms, they still produce significant lumps of cash. The simple conversion of retail uppers into flats, or offices into apartments, will typically produce a healthy six-figure profit over a relatively short timeframe, say 18-24 months.
Compared to the more glacial growth of buy-to-let equity, this regular influx of cash allows landlords to build their portfolios far more quickly than waiting for their existing properties to increase in value.
Is property development more complicated than a buy-to-let?
In many respects, it is – but not usually for the developer. See, when most landlords refurbish a buy-to-let property before renting it out, they will typically hire a jobbing builder and will oversee the works personally, effectively becoming their own project manager. But with a small commercial conversion project, not only will they be able to afford a main contractor, but they can also afford to hire a professional project manager to oversee the project for them. Ironically, the developer makes more money by doing less work, and this ‘hands-off’ approach makes small-scale development a big attraction for people looking for a more passive wealth creation model.
How big are ‘small-scale’ development projects?
There’s no definitive scale. However, as a ballpark figure, you’d typically be looking at schemes that would have a gross development value of between £500,000 and £2.5 million and which would produce target profits of £100,000 to £500,000.
Are they expensive?
Here lies another common misconception. A development project will often require you to invest less of your own cash than a buy-to-let property will, and by some margin.
There are two main reasons for this. Firstly, the commercial lenders who finance developments are happy to lend up to 70% of the purchase price and 100% of the development costs. This leaves you to find a circa 30% deposit, which is not a million miles away from a typical buy-to-let deposit. However, many lenders will allow you to borrow the bulk of your deposit from private investors, rather than funding it entirely yourself.
I know some savvy buy-to-let landlords also look to borrow their deposits from private investors. They then buy below market value and refinance, which allows them to repay the borrowed deposit shortly after the sale. But, in the current market, buying rental properties below market value is increasingly challenging and so the majority of buy-to-let deposits are likely to be investors’ own cash.
Why would a private investor lend you any of their money?
Because the going interest rate for private investment in development is a rather impressive 8-10% per annum, and there aren’t too many places where investors can get that sort of return.
How many small-scale development opportunities are out there?
It turns out, quite a lot.
While the government has been busy squeezing landlords’ pips, they’ve gone out of their way to encourage people to become developers.
Whitehall has recognised the need to repurpose the glut of unused brownfield sites across the country, as this would create up to 1.3 million new homes. And unlike building on green belt land, converting existing buildings is usually a vote-winner rather than a vote-loser. So, they’ve recently introduced a game-changing swathe of permitted development rights that allow developers to change the use of a broad range of commercial buildings to residential without the need for full planning permission.
And if you’ve ever noticed the number of vacant or run-down retail or commercial properties in your local town, you’ll be all too aware of the scale of the opportunity.
Wouldn’t larger, established developers take these on?
Unfortunately for the government, they won’t. Not only are the big players not interested in a few hundred thousand in profit, their model typically involves building new homes on empty fields using existing designs.
Creating one-off solutions to fit within a small existing building is not their bag at all. Yet it’s perfect for small-scale developers who know where the opportunity is.
So, if you’d love to be involved in property but buy-to-let is no longer for you, you might want to consider a small-scale development.
ABOUT THE AUTHOR
Ritchie Clapson CEng MIStructE is the co-founder of leading property development training company, propertyCEO, and co-author of the new book Guide to Small-Scale Property Development, available exclusively on Amazon.