The last few years have seen a significant growth in the number of people taking on smaller property development projects for the first time, as a way of generating serious cash. But what’s involved in tackling a development like this and how difficult is it to be successful?
Property development must be the most misunderstood property business model out there, with so many people assuming you need tons of experience and money to get started. The reality is very different, so let me try and bust a few myths.
Firstly, let’s understand what we mean by small-scale development. There’s no formal definition, but it typically involves projects of between 5 and 20 units, e.g., flats or apartments, which would produce a profit of between £100k and £500k, over a period of 18-24 months. This is a sweet spot, since these projects are much more profitable and more straightforward than a self-build or flip, but they’re too small for the larger housebuilders to be bothered with, so it means you’ve got far less competition. It could be as simple as converting the upper floors of a shop into flats, repurposing an old office or light industrial building.
But if these projects make more profit, how can they be more straightforward? It’s mainly because they have a bigger construction budget, which means you can afford to hire an experienced project manager to oversee the work on your behalf. On smaller projects, you can't afford to hire a project manager, so YOU are the one who has to go on site and deal with any issues that crop up, which can be both daunting and time consuming. A larger budget allows you to appoint a professional project manager and to appoint a main contractor, rather than a ‘jobbing’ builder, which gives you a larger, more reliable organisation with better systems and greater abilities.
In terms of an ideal first project, I would recommend converting a commercial property into residential under permitted development, rather than tackling a new build project where you run the risk of not getting planning permission. A conversion could involve transforming an office, shop, bank, restaurant, light industrial building, etc., into apartments and at present, there’s a vast number of empty sites all over the country. The government is desperate to get these buildings converted and has recently granted comprehensive permitted development rights, which allow us to change the use of these buildings (and others) to residential without needing full planning permission. It means there’s less planning risk, and because you’re dealing with an existing building, the projects are usually quicker than building from scratch.
People often assume that previous development experience must be essential, but the reality is that the new developer won’t be building or designing anything themselves – that will all be done by their team of professionals, including their contractor, architect and project manager, who are going to have decades, if not centuries, of development experience between them.
Instead, the developer plays a more executive role. Their job is to find a viable project, arrange the finance, appoint the team of professionals that will do the work and to be the Chief Executive Officer or CEO. They’ll have regular calls with the project manager, but they won’t be on site every five minutes overseeing progress. 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.
One of your key responsibilities as a developer is to build a team. You’ll need an architect to head up the design side of things, a contractor to undertake the construction and a project manager to oversee the whole thing. I’d also recommend hiring a planning consultant, to ensure you’ve minimised any planning risk and a health and safety consultant, to ensure you’re meeting all the regulatory requirements.
Most of the other professionals you need will then follow on from these key appointments, with recommendations coming from the team. Recommendations are the key to getting the best people – you should always get your team to suggest good people and then back appointments up by interviewing them yourself. It’s also worth mentioning that the development finance meets the cost of hiring all these people – you won’t usually be funding any of these costs out of your own pocket.
Perhaps the biggest misconception about development, concerns finance. Most people are pleasantly surprised to learn that property development usually involves investing less of their own money than buying a buy-to-let property – and for many people it’s one of the biggest attractions. Frankly, the ROI in development is in a completely different league to any other property investment strategy. The irony is that many people have been taught that development is an advanced strategy that you can only attempt once you’ve got a few buy-to-lets under your belt. This is nonsense – you'd arguably be better off doing a development first, which will then give you the capital to start building a buy-to-let portfolio. It’s the logical way round to do it if you don’t have the funds to create a meaningful rental portfolio currently.
The money 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 typically lend you up to 70% of the asset finance, which means you will need to find a deposit of circa 30% to buy the building or land. However, many lenders are happy for you to borrow the bulk of this deposit money from private investors, who typically earn an 8-12% return on their cash annually – an attractive proposition for them – leaving you to fund only a fraction of the deposit yourself. And the same commercial lender will lend you 100% of the development finance to cover ALL of the development costs. Yes, a fair amount of money is deployed, but very little of it comes from you as the developer.
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.
One other key concern for any new developer, is making sure they’ve got their numbers right. That’s where training comes in – getting the numbers nailed is essential, but there are also people who can help you. You should engage with a cost consultant or 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 – gross development value) 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 unexpected additional costs.
As someone who runs a training business, you won’t be too shocked if I tell you that, based on my 40+ years in the business, training is essential if you want the best chance of success as a developer. The numbers are so significant, that not getting trained is always likely to be a false economy. But I don’t think that will surprise anyone. If you’re about to start on a venture that could net you a substantial six-figure profit in less than a couple of years – a model which you can simply rinse and repeat – I think most people would accept that getting trained first is a no-brainer.
We have lots of free training and materials on our website (www.propertyceo.co.uk) but we’ve also created a training webinar, that would be an ideal starting point, which can be accessed at . Small-scale property development is an amazing way of creating wealth, but it’s not easy and you significantly de-risk things by knowing where the pitfalls are before you start.
Ritchie Clapson, CEng MIStructE, is a veteran property developer of 40+ years, an author, industry commentator and co-founder of the leading property development training company propertyCEO. Ritchie is passionate about tackling the lack of housing in the UK and helping ordinary people to be part of the solution. To discover how you can get into property development, visit /bluebricks.
