There was a time when being a landlord was a sure-fire way to make a good return on your money. But the times they are a-changing, thanks to taxation and regulatory reforms over the past five years that have seen a significant number of portfolios become unprofitable and forced thousands of landlords to leave the market altogether.
A raft of permitted development rights that allow non-residential buildings to be converted into residential homes without the need for planning permission have been created with a view to converting the ever-increasing number of brownfield sites that are well-suited to redevelopment as housing instead of building on our highly prized green belt. And there lies opportunity.
But surely major homebuilders have got this market sewn up?
No, they haven’t.
The significant majority of brownfield opportunities sit way below the scale necessary to interest the big boys. The government has recognised this and is instead targeting small-scale developers, many of whom will be undertaking development projects for the first time.
The repository of buildings that are ripe for residential conversion has been increasing of late – look at the number of redundant stores in the wake of the recent collapse of Arcadia, Debenhams, et al. As our shopping habits have changed, so many High Streets have become ghettos. As these primary brands depart our town centres, the secondary retail around them is also affected. There is likely more to follow; when the furlough scheme ends, we will see a significant number of businesses collapse, and their properties, whether retail, commercial or industrial, will become vacant. One struggles to envisage there will be a glut of buyers waiting to snap them up.
Where does this leave the humble landlord? Surely property development is more complex than snapping up a couple of buy-to-lets? Interestingly, the strategies and skills that a new small-scale developer might need are very similar skills to those of a landlord, senior manager, or business owner. There has to be an overarching understanding of what’s involved in development, but most of the heavy lifting and technical issues are delegated to the professional team.
But don’t property developers need to have a small fortune in the bank to develop their projects? The answer in most cases is ‘no’. Whereas landlords typically fund their buy-to-let deposits personally, developers often secure a significant part of their deposits from private investors. The remainder of the asset capital and the development funding is obtained from a single commercial lender.
One major advantage of development over buy-to-let investment is the speed with which capital is created. You can expect a small-scale development project that would typically return a six-figure profit to be completed within 12 to 24 months. For a buy to let investment, the pay-back period is usually a lot longer.
Imagine you have £50k to invest in property, and that the multiverse is a thing. In one world, you use your £50k as a deposit on a £200k three-bed semi, which you then rent out. You clear around £300 per month in profit, but it will be several years before your equity growth enables you to remortgage and raise a deposit for buy-to-let number two.
Meanwhile, on another world, you use your £50k as the deposit on a small development project, a retail building that can be converted into flats using permitted development rights. You obtain the remainder of the financing you need through a commercial lender, and you expect to receive a profit of £150k within 18-24 months. You can also make up any deposit shortfall by tapping into private investment.
And while world-one-you is still waiting for equity growth (and occasionally dealing with broken boilers), world-two-you has made enough profit in 18 months to buy three of world-one-you’s buy-to-let houses AND has £50k left over to start a second development project.
Project things forward and, given that it’s possible to run multiple development projects at once, you can see how world two’s portfolio growth could be stratospheric compared to world one’s.
In our world, the hybrid landlord-developer role is starting to become popular, as existing landlords discover that small-scale development is well within their capabilities.
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