Written by Ritchie Clapson CEng MIStructE, propertyCEO
Small-scale property development projects can generate impressive profits, but only if you know what you’re doing. Here are the five most frequent questions that come up at the property development training company I co-founded, and the best advice I can offer for each:
- What does ‘small-scale’ mean?
Although there is no formal definition, typically you’re looking at projects of between 5 and 20 units – flats or apartments that would produce a profit of between £100k and £500k over a period of 18-24 months.
A new build can fit the bill, but it’s not the easiest route because you need to get planning permission first. A better path for a novice developer is to go for a conversion project. This could be converting an office, shop, bank, restaurant, light industrial building, etc. into apartments.
A small-scale property development project has a bigger budget compared to a flip or a refurb, and this means you can afford to hire an experienced Project Manager to oversee the work on your behalf. The larger budget also means you can afford to appoint a main contractor rather than a jobbing builder, which gives you a larger, more reliable organisation with better systems and greater abilities.
- Is securing finance a challenge for new developers?
The money you need is split into two parts: asset finance, which is used to buy the property or land; and development finance, which pays for the costs of developing the project to completion, including all the finance costs and professional fees.
A specialist commercial lender will usually lend you up to 70% of the asset finance, which means you will need to find a deposit of around 30% to buy the building/land. However, many lenders are happy for you to borrow the bulk of this deposit money from private investors who typically earn an 8-10% return on their cash annually (a very attractive proposition for them) leaving you to fund only a fraction of the deposit yourself. And the very same commercial lender will lend you 100% of the development finance to cover all the development costs. A fair bit of cash is involved, but most of it comes from other people.
- Where do I find a commercial lender?
The best way of accessing commercial lenders is via a broker. The property development lending market is mature and sophisticated, with many lenders and brokers in the field. The massive advantage of using a broker is that they’ll do the shopping around for you – and they won’t get paid until they’ve found you a lender and your project moves forward. This makes life a lot simpler for you as a developer since you don’t have to comb the market yourself. Another great source of investment is through specialist crowdfunding platforms that work with developers and private investors.
- How can a new developer be confident that they’ve got their numbers right?
Engage with a cost consultant/quantity surveyor to ensure your costings are accurate, and you can obtain quotes for many of the costs and fees. You’ll also be getting feedback from local residential estate agents on an achievable selling price. The good news is that it’s not all down to you; your commercial lender will insist that you target a minimum 20% profit based on the selling price of your units (GDV), and they will be crunching their own numbers independently to make sure your deal stacks before they agree to lend you any money. Plus, you would always include some contingency in your numbers to allow for any additional costs.
- Are first-time developers at a disadvantage?
This is a common misconception. The reality is that the new developer won’t be building or designing anything – that will all be done by your team while you play a more executive role. Your job is to find a viable project, arrange the finance, appoint the team of professionals that will do the work, and play the role of CEO.
The core skills you need as a developer are management, organisational, people, and decision-making skills. And these are skills that many people already use in their day-to-day lives, jobs, and businesses, which is why development has such a broad appeal.
Additional tip
Please do your due diligence before jumping in. Property development is an amazing way of creating wealth, but it’s not easy, and you significantly reduce risks by knowing where the pitfalls are before you start. There are books and training available that will increase your chances of success.
ABOUT THE AUTHOR
Ritchie Clapson CEng MIStructE is a veteran property developer of almost 40 years and co-founder of propertyCEO, a nationwide property development 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.
For more property news, visit propertynewsdesk.co.uk