Wondering how to build a portfolio of properties? Read our guide on how to make sure your property development dream doesn’t turn into a nightmare.
The UK’s love affair with bricks and mortar means investing in property has always been appealing to those seeking to expand their money, or even to make it their primary sector. While Brexit and government policies have undeniably influenced the UK housing sector, rendering property construction much less appealing than in previous decades, it is still a strong long-term investment route that can generate substantial returns if handled properly.
In fact, there are signs that the market will recover more in the medium term as the Brexit fiasco eventually starts to settle down. Forecasts from the multinational real estate firm Savills suggest that both UK home prices and rental rates are projected to increase by 15% in the next five years and that even greater incentives are available in some areas of the UK. For example, the same research predicts house prices in the North West to rise by 24 percent over the same period.
This guide will show how to enter real estate development, offering advice in the following areas:
- Coming up with a property development company strategy
- Buy-to-let vs buy-to-sell
- Market Research
- Calculating ROI/Rental Return
- Renovating for sale or lease
- Funding your property develpoment
- Final thoughts
No matter what your aims are, you will need to begin by coming up with a property development company strategy.
Creating a property development business plan
To a certain degree, all business plans are the same – you need to decide precisely what you want to do with your business and how you are going to do it (as outlined in our business plan template). If you’re creating a proposal for personal use, then you won’t have to go into as much depth as if you were to launch a full-fledged property development business and investor pitch, but there are still some core aspects you need to be sure about before you launch into investing.
Start by finding out the following:
- Who’s your target market?
- What kind of assets are likely to cater to your target market?
- How are you going to get the funding?
- Expected timeframes and costs for construction or renovation
Buy-to-let vs buy-to-sell
The key decision you need to make is whether you want to operate on a buy-to-let or buy-to-sell business model.
For buy-to-let, you’re going to purchase a house and rent it out, use the rental income to pay off the mortgage on the home – and you’re going to make a little extra profit.
Although that could sound appealing, and considering that the dramatic increase of UK house prices has created a massive demand for affordable rental accommodation in towns and cities, you will eventually be responsible for managing the property – including maintenance plans, ensuring that items like a smoke alarm and boiler are routinely checked, and possibly also attracting renters, etc. A letting agency will take care of a lot of this job for you, but inevitably it will bill for these programs, cutting into your earnings.
Buy-to-let is a wonderful opportunity to have a long-term revenue source, but it’s not an easy way to make a fast buck – you’re going to have to dedicate yourself and still remember that the interests of your renters are paramount (they’re generating your revenue after all). You will still need to prepare for an empty period, because it is possible that the apartment may often stay vacant when you’re in the process of seeking a new tenant.
For buy-to-sell (also known as property flipping), you’re going to purchase a house, keep it for a brief time, and then sell it again. In order for this approach to be successful, you would usually need to purchase a property that needs renovation, whether it’s improving the interior or turning the attic into an extra bedroom. You then make the requisite repairs and sell for profit, making sure you weigh in the cost of your job. The more work you do, the greater the cost, and the greater the future benefit – so it’s a good idea to start with something simple and get your mind around the process.
Staying on top of the cost during renovation/construction is key, so make sure you carry out a thorough schedule before you start to have some leeway (at least 10%). A project that comes under the budget is almost unheard of – a lot of it cost more than originally anticipated.
Your connections will be important, so make sure you have a “black book” of contractors, plumbers, engineers, and electricians who you can trust to do a good job. Alternatively, you can try to do the research yourself to hold costs down. The drawback to this approach is that if you’re selling at a profit, you’re going to get a lump sum that you can spend for your next investment, making this a much easier way to develop a portfolio of assets.
It is also important to note that you can switch from one model to another, eventually selling a property after renting it out for a few years, for example, or using the proceeds from a buy-to-sell property to invest in a buy-to-lethome.
Your strategy may also change depending on the market environment, so versatility is key.
Bruce Burkitt, nanaging director of residential property management firm Property Experts, advises planning an exit strategy, explaining that if the main goal is to resell the house, then the target is to sell the home 10% less than the market value of today, as it is a difficult market. In this case, if prices go down, there’s a cushion for the investment – but if it sells for more, it’s a pleasant surprise. Nevertheless, in the event that values fall and the house does not sell, owners will ensure that there is finance in place to take out a buy-to-let mortgage on the property, and that the rental values will meet mortgage repayments by at least 150 percent. Whichever path you select, thorough research is important.
- Buy-to-let is a perfect way to get long-term income
- Buy-to-sell is a fast way to develop a portfolio of assets
- You may need to mix both models.
Before you pay a single cent, you need to do your sums to learn exactly what the problem is in your chosen field. You’ll need to know what the buyer/renter in the area is asking for, and how much you can afford to pay for the house.
Location, Location, Location
It’s such a cliche that it’s also the name of one of the biggest property TV shows in the UK, but finding the right location is a massive part of the success of property growth. However, this doesn’t mean that you should always invest in the best part of town – whether you want to rent out or sell your house, the chances are that rates will already be at their height, and the value of your property won’t increase dramatically. Instead, the trick is to locate places before they get hot and house prices surge up.
Look for locations on the outskirts of popular parts of cities, as the process of gentrification is likely to spread when residents are priced out of the hottest places. Property platforms like Rightmove provide conveniently searchable data on the prices of houses rented in various locations.
Please put yourself in the eyes of your target audience. Transport ties are vital; young people and graduates want bars and restaurants on their doorstep, while families want a secure community and good schools.
Make sure you get to know the local estate agents, as they know what the buyers and tenants in the area are looking for. Check in frequently to build up your personal connections, which means that you will be the first to learn when new assets are on the market that may match your needs.
If you’re looking for buy-to-let properties, then university cities are a great option, with Urbane Brix’s David Potter noting that areas near universities tend to be a sound investment. As the number of students increases, the need for student accommodation is at an all-time high, and this gives investors good returns that are often guaranteed for three to five years. Paul Wheatcroft, Property & Mortgage Expert at My Local Mortgage, advises to tackle auctions, since they are a safe way to discover true value for investment properties – only be sure you are conscious of the procedure and possible drawbacks. Especially relevant is the reality that in real estate auctions, a deposit is due on the day for every property, so this deposit is not refundable if anything unfavorable occurs. Repossessions are another option, and while these are less common than five to 10 years ago, they offer similar value to auctions. Awareness of such sales is another advantage of having good relationships with local agents.
Calculation of ROI/Rental yield
In almost any business, ROI (Return on Investment) is critical, as it is the only way you’ll understand whether a specific project has created a gain or loss. And property development is no different – you will have to be certain that you understand what has to be thought about concerning prices, and get your own maths right.
On paper, exercising a buy-to-sell ROI is straightforward. It is your sale price minus (purchase price plus costs).
Depending upon your finances, the cost might be more complicated than it seems, as you can only use the money that you’ve actually put up, which generally is going to be the deposit to your loan or buy-to-sell mortgage (a traditional mortgage is not likely to be acceptable to get a buy-to-sell home). Obviously, you’ll also have to repay the loan amount if you sell, therefore incorporate this on your calculations, and ensure the property increases in value sufficiently to render you a good profit once you have repaid your mortgage or loan.
The tricky bit is figuring out your prices. The majority of this total is going to be the cash spent on renovating or refurbishing the home, but in addition, you should take into account the costs of organizing finance, any loan/mortgage obligations, survey fees, attorney fees, estate agent charges, and smaller expenses like insurance, utility accounts, and council tax.
You will also have to think about the tax consequences.
Buy-to-let ROI (Rental return)
While buy-to-let ROI isn’t fundamentally distinct from buy-to-sell ROI, it’s a bit more complicated, since you will want to work out your rental return (the yearly yield on your rental home). In its basic form, this can be relatively easy:
Total annual rent divided by purchase price
Let us begin with the simple bit. To figure out your yearly rent, multiply your monthly lease by 12.
So, let us say you rent out your house for 1,250 GBP per month – the yearly lease would be 1,250 GBP multiplied by 12, which equals 15,000 GBP.
Then you divide this by the quantity of money that you purchased the home for – let us say 400,000 GBP for this example.
15,000 GBP divided by 400,000 GBP equals 0.0375
To convert this to a percentage, multiply it by 100.
0.0375 multiplied by 100 equals 3.75
So in this example, your basic rental yield is 3.75%.
Regrettably, matters are somewhat more complex in the actual world, since you will have to look at purchasing prices (i.e. broker fees, survey costs, and other expenses), in addition to the expenses of arranging and paying for some buy-to-let mortgage or other similar financing.
This is the basic formula:
First, put the deposit and buying costs together, because the next bit will use the total number.
Use this calculation:
(Annual mortgage price minus yearly lease) divided by (deposit and buying costs)
To correctly explain this, let us go back to our hypothetical case.
When we utilize the exact same case as before, the buy price was 400,000 GBP. There is a buy-to-let mortgage provided on the basis of a 25 percent deposit, which means that your deposit will be 25 percent of 400,000 GBP. The simplest way to work out this would be to multiply 400,000 GBP by 0.25.
400,000 GBP multiplied by 0.25 equals 100,000 GBP.
So, your deposit would be 100,000 GBP.
Buying costs vary, but to get a 400,000 GBP home, approximately 3,000 GBP is fair.
So, the total of your deposit and purchasing prices is 100,000 GBP and 3,000 GBP, which can be 103,000 GBP.
Now, we will need to work out the price of the mortgage. Buy-to-let mortgages are frequently offered on an interest-only foundation, where you pay the interest on the amount loaned instead of paying the sum back.
If the interest has been 5 percent, then the entire cost of this mortgage will be 5 percent of the amount of the loan. Remember you set up 25% for a deposit, so the amount of the loan will be 300,000 (75 percent of 400,000 GBP).
At this point you will need to work out 5 percent of 400,000 GBP. We can do this by multiplying 0.05 and 400,000 GBP.
That amounts to 20,000 GBP.
For measuring your mortgage’s total expense, you’ll need to split that number over how many years your mortgage spans. In this example, we’ll say 2 years, so the annual cost is £20,000 divided by 2, which is £10,000.
You have all the components for a fantastic idea of your yearly yield – in other words, the profitability of this undertaking.
While this may appear a reasonable yearly return, you also should think about taxation, maintenance expenses, letting agent fees, and other expenses, all which will eat into your profit.
The calculation above assumes that the land will be leased for all 12 weeks each year, however in fact, you will also have to budget for void periods if it is vacant and no cash is coming in.
If you are going to make the economics of buy-to-let work, then it is absolutely vital to figure out what you want to charge in lease, and what you could afford to pay for a home.
- Buy-to-sell ROI = selling price – (acquisition price+cost)
- Buy-to-let rental return = (annual mortgage cost minus annual rent) divided by (deposit plus acquisition expense)
- For buy-to-sell, you do need to bear in mind the cost of construction
- For buy-to-let, calculate in tax, maintenance charges, letting agent fees, and vacant dates.
Importance of timing
The essence to great humor is timing, and the same can be said for great property development. When you’re looking for an investment property, you’ll need to keep cool and do your homework properly. Look at the sales rates of the places you’re looking at, and figure out the floor and ceiling price for the type of property you’re looking for – e.g. a two-bed terrace house or a one-bed apartment. Next, find out what drives the gap between floor and ceiling values – is it the state of the interior, transport connections, proximity to good schools, being just off the busy highway, or any other factor?
You will ought to use the same forensic eye when finding a place to invest in. It’s often a good idea to start relatively close to home as you have a good knowledge of the local area, but you may need to venture further in order to find a location with a strong growth potential. Look for an environment where properties sell quickly and building or renovation work is taking place, as both of these are great signs of something good for the future.
Don’t let estate agents pressure you to a deal before you’ve done your research. While they can be a great resource, at the end of the day, they’re trying to sell property as quickly as possible for as much money as possible. Stay strong as they try to put pressure on you to make a quick decision. It’s a lot better to miss out on a house than to neglect a serious problem and end up with a money pit that no one wants to buy or rent.
However, while you should take the time to choose, once you’ve discovered a property that checks the right boxes, you’ll need to act quickly to secure it. Property markets in popular areas are moving fast, and you will need to be proactive in protecting your investment property. Don’t overpay, however – set the budget and stick to it. If someone else pays more, they may have advantages that you don’t have (for example, being a professional trader) or they may simply be more positive about the property market in that region.
Many successful property investors rely on the adage that you never regret the deals you don’t make. Consider this when you miss out on a house.
Renovation for sale or leasing
Speed is also important when you renovate – the faster you can restore your house, the better you can get it out on the market and make money. Don’t be hasty, though, and don’t cut corners – prospective customers or renters would be turned off by rough edges or a poor-quality finish. When renovating a house, please keep in mind the following points:
Consider your ideal buyer or renter
If there is a cardinal law in the development of properties, it’s this – it’s not about you. Each choice you make should be based on ending up with a property that will cater to as many people as possible.
Seasoned property investor and chair of Women in Property Mandy St John Davey advises that you don’t be tempted to over-personalize an investment house, and make sure you have your business head firmly fixed. Be particularly vigilant about using too much color — one person’s vibrant and bold is another person’s garish, and while magnolia walls can be dull, they make rooms look bigger and can be customized by tenants or buyers.
It is equally important not to blow the budget on fixtures and fittings, particularly if you’re investing in a mid-priced place. Hold the target group in mind, and talk of what they’d expect. College tenants do not require, want or wish to pay for a swanky bathroom suite, whereas young professionals may be able to pay a premium for a trendy and elegant space. Locations will always have a huge price influence though, so check property sites to see what’s selling, and learn more about what kind of interior is found in higher priced properties.
Keep on track
When renovating a home, your main expertise will be project management, ensuring that you know where and how each aspect of construction is being handled, and how much it will cost.
In order to ensure that you can keep track of all details and not incur the added cost of having to change items during the renovation process, Mark Cooper, co-founder of Progressive Property, suggests creating a thorough design sheet that points out what needs to be updated in each room, what needs to be repaired, what needs to be inspected/tested, and what needs to be left alone.
You may also take advantage of some of the excellent project management resources mentioned below, which make it easier to provide an outline of the project, make notes, track progress, and provide instructions on the move.
The bare necessities
Even though you don’t rent to Baloo the Bear, there are always certain things that everybody will demand from a leased or bought house, and they will cause a lot of concern and trouble if you don’t get them right. These include:
- The boiler
You won’t know how much the boiler does for you before it goes wrong. It heats the room, offers hot water for your morning shower, and even pulls its weight in the kitchen (just try washing without hot water).
They come in all shapes and sizes, just make sure you do your homework carefully – not all boilers are suited for all properties. The best option for you will depend on where it is kept, the requirements/size of the house, and the current pipework. When choosing a boiler for your renovation project, make sure you weigh all the necessary factors.
- Home security
No matter who owns or leases your house, feeling secure at home is likely to be high on their list of goals, so make sure that is a core area of focus.
This is much more important for a buy-to-let home, as it is the legal duty of the owner to ensure that every rental property meets essential protection requirements, including doors and windows that can be safely secured and locked. Any funds you spend in home protection will also lower your insurance costs, and while there is no legal obligation for homeowners to have insurance in place, the buy-to-let mortgage provider can require you to take out a policy.
For higher-priced homes, the home protection requirements are likely to go far beyond closed doors and windows. An intrusion alarm would be a must, so you may want to find a guard response system and a CCTV system as well.
- The kitchen
How much money you spend on the kitchen would depend on your target audience, but it’s a vital feature of most households, and a room that needs to be carefully prepared. The minimum prerequisite is a clean space that works efficiently, but think of how the room is going to be used, functional criteria such as storage, and making sure the sink and any appliances are readily available.
Remember: it is the duty of the landlord to ensure that all electrical devices are secure at the outset of each tenancy, so make sure they are routinely inspected and updated as necessary.
Although this could be a considerable cost, it will make the properties more attractive for tenants and reduce the risk of fire or other hazards from faulty appliances. Legally, you must also ensure that the devices are routinely tested for gas safety by a licensed Gas Safe engineer and that someone renting out an HMO (Houses in Multiple Occupation) must ensure that PAT (Portable Appliance Testing) tests are carried out at least once every five years.
Outdoor space is a crucial want for both buyers and renters, so if you’re buying a garden house, make sure you optimize it. Again, the target demographic is important here: families with children are likely to want an unbroken expanse of green lawns, working people want something simple to manage, while students will only want a fun spot to have a drink in the sun.
Think of the movement of the sun as well – if that old shed in the corner is occupying the sunniest spot, then knocking it down and building a pergola will make a big improvement in the usefulness of the garden and it will improve the desirability of your land.
- It’s not about you – just make a decision with your potential customer or renter in mind
- Project management is vital – you need to know exactly what has to be done, how long it will take and how much it will cost
- Get the details right: furnace, home protection, kitchen and garden (if the property has one) are all important aspects of a renovation project.
Financing Your Property Development
There are five simple choices:
- Money – Unlikely to be a choice when you are just beginning, but keep in mind when you’re farther along your development career.
- Buy-to-let mortgage – If you would like to lease a property after purchasing it, then you certainly won’t have the ability to use a typical mortgage instead, you’re going to require a mortgage. These are offered on an interest-only foundation, and possess fees that have larger interest rates, and a higher deposit compared to a mortgage.
- Buy-to-sell mortgage – Likewise, a normal mortgage will not be acceptable for those intending to purchase, renovate, and sell on a home. An elastic or buy-to-sell mortgage will permit the house to be sold by you soon. Of course, you pay this flexibility in the form of much higher interest rates, higher fees, and a much larger deposit.
- Bridging loan – A bridging loan is a high-interest, short-term loan, often used by people who need to buy property while waiting to sell another. These are also common with property developers who can use bridging loans to purchase, repair, and then sell a house, paying off the loan and interest in the process. They are a guaranteed loan, and it’s suited for people who already own properties or land to secure the loan. You will also need a clear exit plan, i.e. a clear strategy on how to pay off the loan at the end of the term.
- Property development finance – Commonly offered to established property development companies, this is essentially a sort of business loan for land development businesses, meaning it will normally take into consideration your turnover and other fiscal figures.
- Personal loan – If you have inherited a home that requires a little bit of TLC or only need a little additional money for mild refurbishment, then taking out an unsecured personal loan may be a fantastic alternative.
The vital issue to note about land development is the fact that it is not a fast method to create a quick buck — while analysts are cautiously calling the marketplace to recoup over the medium term, it is likely to be quite a while until it returns to the type of enormous profits we saw previously. But if approached with the ideal mindset, it can be a good supply of long-term investment.
If you are tempted, start by completing these six measures, they will be critical to the achievement of your aims.
- Generate a property development company plan
- Choose whether you would like to utilize a buy-to-let or buy-to-sell business plan (or maybe a combo of both)
- Research your market carefully – you will have to understand what’s selling, for how much, and what buyers are searching for
- Figure out your ROI/rental return, this gives you a good notion of how workable your strategies are fiscally
- Consider your target market – what you do ought to have your perfect tenant or buyer in your mind, think of what they’re searching for, not what you wish to do
- Sort your finances – whatever you need to do, you are going to need money, therefore carefully consider the financing options available and figure out how you’ll manage the payments
You are all set to get started – good luck!