By Ritchie Clapson CEng MIStructE, co-founder of propertyCEO
If you are considering property as a potential investment opportunity, career path, or spare-time enterprise, there are a variety options to choose from. Small-scale development is one area that an increasing number of investors and landlords are moving into. It can be lucrative, and a lot less scary than many people imagine.
What do we mean by small scale?
Typically, you would 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 us 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. If your next project saw you convert 12 flats, based on the same numbers, you would make £360,000. In development terms, that is relatively small beer, but compared to the long game that is buy-to-let or a graft-intensive doer-upper, nice numbers.
Is there a great deal of work involved?
As there is more money involved compared to a flip (a small project where savvy DIYers and bargain hunters freshen up run-down homes and flip them on for a profit), developers can afford two things that make their lives considerably easier.
The first thing you can do is hire a Project Manager. The Project Manager’s job is to oversee the development for the developer. Worried you might be out of your depth (or get exasperated), turning up on-site to manage architects and contractors? Well, your Project Manager will do this for you. A highly experienced set of eyes and ears managing things on site, looking after your interests, and reporting back to you regularly.
Secondly, developers can also afford to 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 there is only one relationship to manage, and the contractor then coordinates all of the construction team.
Additionally, because you have a main contractor AND a Project Manager, you do not need to oversee everything yourself—you play the role of CEO instead of being a hands-on-newbie-project-manager—leaving you with more time than if you were involved in a smaller project where you frequently need to be on site. In fact, most small-scale developers oversee their projects in their spare time.
What skills do you need?
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 are the ultimate boss. It is 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.
Remember there is risk
There is a reason why property developers take the lion’s share of the profit, while everyone else gets a fee, and primarily it is all about risk. There is no getting away from it – property development has many moving parts and is inherently risky. But, if you get yourself educated, it is possible to de-risk the development process significantly. It is the people who ‘jump in and go for it’ who tend to come a-cropper. I have certainly trained many developers who had learned the hard way that they did not know what they did not know.
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.
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 could not be better to take a long, considered look at the opportunities offered by small-scale development.
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 minimize risk and maximize returns.