By Ian Child, propertyCEO and author of ‘Your Own Personal Time Machine, a guide to getting your life back’
Many people were losing their appetite for the buy-to-let investment model even before the stamp duty surcharge on additional homes increased to 5%. For a while, a number of landlords have been wondering if property is still a sector they want to be part of – their numbers are likely growing. So, can property still provide opportunities to earn some serious money? And can those opportunities be relatively easy, and not take too long?
Step forward small-scale property development.
Defining our terms
Small-scale property development involves taking a small commercial building of some description and converting it into residential flats. Perhaps the most straightforward example is putting flats above a shop – it doesn’t need to be any more complicated than that. And, just to be clear, flipping a house or a doer-upper is NOT small-scale development; I’m talking about the next level up. Although, if you’ve done a flip or you’re an existing landlord, small-scale development should definitely be on your radar.
We should look at what we mean by “serious money”. I suggest our target should be £200,000 – not a massive lottery win, but a tidy sum for most people. A timescale of two years is reasonably short-term but still allows time to do whatever we need to generate the target profit. And as for ‘easy’, we need to consider the amount of work to be put in, so we’re looking for something that can be done in spare time. We’ll also want a modest amount of seed capital of between £10,000 and £20,000 – within reach for a significant chunk of the population.
Why try small-scale property development?
The niche we’re looking at will typically involve building between five and 20 units, and you’ll be targeting a 20% margin on the total gross development value (GDV) of the units you’ll be selling, i.e. their combined selling price. The GDV amount will vary based on what and where you build. However, you would typically expect this to generate a profit of between £100,000 and £500,000. So, to achieve our ‘serious money’ target of £200,000, we need to find a project that produces a GDV of £1million. How many flats does this mean we’ll need to build? The average flat price in the UK is around £200,000, which would mean building five flats, although it clearly depends on what we build and where we build it. But we’re certainly not talking dozens.
On paper, banking the cash from one of these projects from start to finish in less than 24 months shouldn’t be a problem. It will take you around three months to purchase the building, and because most commercial buildings have permitted development rights, you don’t need to apply for full planning permission to change the use from commercial to residential. You simply apply to the council for prior approval, and they must respond within eight weeks; otherwise, approval is automatically granted. You will also need to apply for planning permission if you’re changing the building’s exterior elevations however this is not usually contentious. Because you’re dealing with an existing building, you’re not having to build anything from scratch. Not only is the structure already there, so are all the services, such as gas, electricity, water and drainage. You’re simply altering the building to reflect its new use. Let’s say we allowed a further three months following purchase to get everything in place and then nine months to physically do the work. Add on another three months at the end to sell your finished flats, and you’re looking at an 18-month timeline, comfortably within our 24-month criteria.
While developing property involves a lot of work, most of it isn’t YOUR work. Property development must be among the most highly leveraged industries in the world. As a developer, you find a project, source the finance and then assemble a team of professionals who will build it. But all the physical construction work is done by other people: contractors, architects, planning consultants, structural engineers – there’s a long list. But their job is building homes, and they’ve already got tons of experience. All you need to do is hire them. And you get to hire an experienced project manager to oversee the project; they will be your eyes and ears on the ground, ensuring everything goes according to plan, and will keep you updated as things progress.
Initial investment
Small-scale development is relatively quick, makes serious money and can be done in your spare time. But there’s the issue of cash. You’ll need more than the £10-20,000 seed capital we’ve allowed ourselves. However, we come to property development’s biggest secret. Yes, you do need lots of money. But very little of it needs to be your own.
Here’s an example to explain.
Let’s say we want to buy a shop for £400,000 that we plan to spend a further £400,000 to create some nice flats on the upper floors. We’d then sell these flats and the shop for £1,000,000, making a £200,000 overall profit. To buy the shop, we would borrow up to 70% of the £400,000 we need from a commercial lender (there’s a ready market of specialist lenders out there who lend to developers). But a 30% deposit is £120,000, which is way above the £10-20,000 seed capital level requirement we set ourselves at the start. But here’s the thing: you don’t need to fund the entire deposit yourself. Many commercial lenders will allow you to borrow the bulk of your deposit from other people—private investors—to whom you’ll pay interest, typically around a healthy 10% per annum.
In most cases, the lender will insist that you personally have some skin in the game, so you won’t be able to borrow all of the deposit. You may need to put in 10% of the deposit yourself – which in our example would be £12,000. We’re now comfortably below our seed capital threshold. So, we now own the shop, but what about the additional £400,000 we need to develop it? Well, the same commercial lender will lend you 100% of that money. That’s right, you don’t need to fund any of the development finance yourself. And that £400,000 development funding covers not only the main costs such as materials, labour, and professional fees, it also covers the cost of the finance itself, including the interest.
Which means, using our example, we managed to turn £12,000 into £212,000 in less than two years, which is rather impressive.
Property development isn’t without risk, and finding a good deal takes time and effort, but the numbers make a lot of sense, and the government is also actively encouraging development. And there are many empty shops and commercial properties are out there – the countryside charity CPRE estimates that there’s enough empty brownfield land to build 1.2million new homes, and that number is growing each year. It’s no surprise, then, that an increasing number of landlords and other investors are turning to small-scale property development.
