A small project in property development industry terms can be quite literally life-changing from a personal income point of view. But before committing to a project, do make sure you are aware of the risks and choose your projects wisely.
Economies of scale play a part: from the developer’s perspective, building a hundred units is not ten times the work of building ten, but it can produce ten times the profits, if not more. But with greater scale comes greater complexity and risk. If your project gets unexpectedly held up, then you will much prefer to be paying interest on a few hundred thousand than on tens of millions.
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, if you’d like to make an average of £100,000 a year, you could do one project every 18 months that produces £150,000 in profit. That equates to a GDV of £750,000, which in development terms is very small. Or you could do two even smaller schemes with a GDV of £375,000 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.
The next big question is what to build? Here is where you need to be thinking about reducing risk (again). Building a £1 million luxury house is riskier than building five £200,000 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 one to two-bed flats, or houses with up to three-beds. Five-bed detached luxury houses look nice, but they are a non-essential purchase and can be more difficult to sell in a tough market.
Risk crops up again when it comes to planning. Although the recent Queen’s Speech announced an 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.
How far away should your development be from you? Ideally, you want it 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.
What about your workload? Can you really afford to develop property full-time? Luckily, property development is one of the most highly leveraged business models there is. In fact, you do not need to lay a single brick; a team of professionals will deliver your projects for you, plus you will have a project manager to oversee everything.
As the developer, your key roles are to create the ‘brand’, find a team, source development opportunities, and arrange the finance. All teachable skills and roles that most people should be comfortably able to do in their spare time. However, you will need to have a little flexibility in your working day, as there will be occasions when you need to take calls and have meetings.
The final thing you will need as a developer is an edge. Edges come in two primary flavours. The first edge involves knowing how to make more profit from an opportunity than the competition, which in turn means you can afford to pay more for it. Luckily, this is a skill that can be learned, yet it is surprising how few developers understand how to take advantage of it.
The second edge involves creating an exclusive (or almost exclusive) dialogue with the vendor or their agent, which means you will have little or no competition. Again, the secrets behind this are eminently learnable for the novice developer. And if you can find both edges in one project, then you are doing very well indeed.
If small scale property development interests you, be prepared to do a significant amount of homework. Find out where the demand is in your target area and who will be buying: downsizers, young professionals and families each have different requirements for location, transport links, local amenities, and home design. Your local estate agents will be a valuable source of guidance.
And never forget that you are building for your customer and never for yourself. Always focus on your bottom line. You may fall in love with Pyrolave enamelled lava countertop, but if it will put a dent your profits, go for something plainer. After all, you will not be living there.
*Ritchie Clapson CEng MIStrucE is co-founder of nationwide property development and training company propertyCEO