Thanks to TV shows like ‘Homes Under the Hammer’ and ‘Property Ladder’ it seems that being a property developer is a quick and easy way to make money.
However, there is a lot more to buying a quick property, doing it up and selling it at a higher price.
There are several characteristics that make a good property developer and below we cover some of the most important things to help you start out and build up your portfolio.
Buy-to-Let Vs Buy-to-Sell
You have two main options when operating as a property developer – whether you rent out to tenants or build something and sell it.
The buy-to-let refers to owning a property and then generating income by renting it out to lodgers or businesses, allowing you to earn regular monthly income. Buy-to-let mortgages are quite accessible providing that you can put down a 25% deposit.
The buy-to-sell option relates to the quick in-and-out approach of purchasing a property, fixing it up and selling it once complete for a higher amount. This can provide you with some large returns in the short-term but your profits can be easily wiped out due to unexpected problems along the way or a fall in the housing market.
So buying at the right time and understanding the property demands and trends of the area are key to be successful. A good property developer is able to suss out market and find a good deal.
Location, Location, Location
It may be more profitable to select a property in an area that is unknown or up and coming. You hope to take advantage of the area being regenerated in the future and the chance of big businesses, stadiums or landmarks being constructed. Examples of areas like this include Wembley, Highbury, Tottenham and Shoreditch. There can also be opportunities to build around a Commonwealth Games or an emerging Premiership football team such as Huddersfield Town and catering to the wealth that comes with it.
Maximising Your Profit Margins
Property developers should aim to work around the 30% profit margin and also have around 30% in terms of a contingency plan if things go wrong. It is important to have good control of your finances because there are additional costs that can wrack up when developing a property.
It is not just the property price that you are paying but also the stamp duty, buildings insurance, contractors, materials, solicitor fees and management fees. You are required to pay tax on buy-to-let properties and if this falls into the higher tax bracket, it will be as high as 40%. For a buy-to-sold property, you will incur capital gains tax of 18% to 28% so understanding your margins and what you can afford is essential.
Selecting The Right Property
A lot of beginners will focus on what a property can be sold for, but the true skill is finding one that you can buy at the right price.
Starting off with a property that was bought at good value will allow you to be on track to earn a 30% profit.
There are other options like purchasing at an auction or probate which can sometimes allow you to grab a discount of up to 20%, but the condition of the property may be compromised so you have to weigh this up against the cost of renovations and refurbishments.
Fittings and Kerb Appeal
Part of maintaining your costs is spending the right amount on your fittings. Appliances like fridges and other white goods are essential but you need to tailor the fittings to the asking price and the audience. For example, there is no point spending on a luxury kitchen and en-suite bathrooms if it is student accommodation, but then you would expect these features in a high-end property development.
Bright colours may be more attractive to student markets, but something with a more sophisticated form of architecture will be more appealing to high-end buyers. Making sure you have kerb appeal is essential and this means making sure the property looks good from the outside such as good lighting on arrival, flower beds and even good signage. (Source: KSR Architects)