How To Become A Property Developer

What are the common mistakes when getting started in property development? Can they be avoided?

They can be avoided very easily if you speak to professionals upfront. So often, people come to me having bought a property at auction, and halfway through the refurb they run out of money.

They have bought the project in their own name rather than a company name, so they didn’t speak to an accountant. They didn’t speak to a broker and haven’t spoken to a builder. They just thought they could do this, bought the property, tried to run the project and spent all the money. Now they’re stuck.

We can always help those people, but it becomes very costly and eats into a lot of the profit they were expecting to make. You can avoid the biggest mistakes by speaking to a broker upfront, whether or not you plan to keep the property.

Although bridging finance seems expensive, it allows you to do a project with a lot of your own money saved. You can fund 60% to 70% percent of the deal with a lender, and still keep the profits.

So talk to a broker upfront, go to an architect and a builder and get some quotes. Ask what you can do to make the property a better sale. Plus, speak to an accountant.

In most cases, setting up a limited company is going to be a better option, whether you’re retaining the property for income or for selling. I’m not an accountant, so please do speak to one, but that’s often a good option if you’re taking a business route.

Remember that in almost every single episode of Grand Designs they end up living in the caravan for two years longer than they expected. They always exceed the budget. Those projects are people’s main homes, so they become emotionally involved.

It’s very easy to get carried away and upgrade the bathroom from the £15,000 one you saw to a £30,000 one. That’s where those people fall down. They budget at the beginning and once the emotions get involved, they don’t make good business choices.

How should you assess your borrowing capacity?

With these sorts of projects, it’s not really about you as the client, assuming you’ve got decent credit and can fund your part of the deposit. The borrowing capacity is really based on the building.

So if you’re purchasing something under market value to be refurbished, you can borrow 65%, 70%, 75% or even up to 80% if we have to – but that becomes quite costly.

I would suggest that you find perhaps a 30% to 35% deposit and then get finance for the refurbishment works. If it’s a ground up development we can fund 100% of the build costs or development costs, and 65% to 70% of the land cost.

So you can borrow a great deal of the money to do this. The other aspect, if you plan to keep the property, is to make sure that the expected rent will cover a Buy to Let mortgage at the end. We would always look at a mortgage quote at the beginning so you know what to expect.

What’s the difference between a property developer and a property manager?

They’re very different. A property developer is someone who’s buying to refurb and retain, or build from the ground up. They’re hands-on and they’re building their own equity and assets.

A property manager is someone like an estate agent, who manages your tenancies for you and your release agreements if you’ve got commercial premises.

People listening to this are probably wanting to be property developers. Once you’ve got a big portfolio of properties, you might have a property manager helping you.

Does a property developer also need to be a builder?

No, but I do get a lot of enquiries from builders. Having done builds for other people, they decide to do it for themselves. But you don’t need to be a builder as long as you have qualified professionals doing the relevant work.

So if it’s an extension, have a builder do it. If you’re capable of doing it yourself, get it signed off and checked. While you don’t need to be a builder, having relevant experience in those fields can help you with planning upfront. I would definitely engage a builder early on if you plan to do any works to properties.

Do I need a property development team? If so, who should I include?

If you’re thinking about ground up development, you’ll need an architect to help you make your planning application. They will run that and do the drawings for you. They should help you manage the plan through, as well.

You’ll also need a site manager or project manager who will organise the various contractors, and an accountant as well. If you’re thinking of buying something to refurb and then either keep or sell, I would still engage a builder early on to give you quotes.

An accountant is also important. In both cases a broker can give you advice on exit strategies if you plan to keep them, and help minimise your costs. We’ve seen these deals hundreds of times in various different forms – commercial, ground up developments and very large estates with hundreds of houses. We’ve also helped people build an extra home at the bottom of the garden.

So it’s unlikely you’d come to us with something we haven’t seen or had no experience with. That means we can give you a lot of advice on whether the numbers you’re showing us makes sense and the project is feasible.

What else do we need to know about being a property developer?

The biggest takeaway is to really understand what your goal is. We all like painting and decorating, but you need to decide whether you want to build a portfolio of properties, or whether to build and sell.

Do you want to be involved from the ground up? Those projects are a lot harder, with more headaches, but have a greater yield. Think about your 10 year goal, the 20 year goal, retirement plans and work backwards from that.

Then, have a conversation with your broker and put steps in place to get from here to there. We can help you map out that business plan together. We can help you understand what projects to look for and how to grow those up to bigger deals to meet your future goals.