Investing in property has always been attractive in the UK and over the long term, bricks and mortar have consistently yielded good results. Figures and estimates suggest that Britain needs around three million new homes in the short to medium term and even Brexit and the Coronavirus have not dented the demand or reduced people’s appetite to get developing.
Over the decades, single developers and smaller firms have been squeezed out with over half the current development in the UK in the hands of just a few construction companies. But there is room on the bench for newcomers and the solidity of investment is still attractive – the deficit in the supply of new housing even more so.
There were promising signs that with the resolution of the Brexit saga, the property market would rebound a little but this has quickly been quashed by the economic ramifications of the Coronavirus pandemic although the UK government is determined to support the housing market through these difficult times witness the very recent stamp duty holiday. The premier estate agent, Savills, had predicted a price rise of 15% over the next five years pre Covid-19 with some even higher figures in the regions, 24% in the North West. Some of that may be salvaged due to the government’s determination to prop up the housing market also fuelled by the chronic shortage in UK housing, a saga which just never seems to end.
Start by creating a business plan
A property development business is no different to any other, you still need a business plan which focuses in on all the detail of the development with proposals clearly outlining how you are going to achieve your goals. Anything that is going to be pitched to investors needs to be comprehensive, detailed and bulletproof. Before you start, here are some key points to consider:-
- Who is your target market?
- What sort of properties is likely to appeal to this market?
- What are your funding sources?
- Estimated timescales and the costs for construction or renovation; it is essential to have a third party, professional valuation for your development project rather than just relying on your own estimates or values provided by estate agents
- Cashflow is critical, many great projects fail simply because their cash flow is weak or not thought through. You must understand and have provided for how you will pay the bills whilst you wait for the properties to sell
- If you are targeting investors or lending institutions then your plan must be pitched and slanted towards them, clear and to the point with the most important aspects to the fore and easy to grasp hold of. Most people use professional help for this like a specialist broker. Include the structure of your company, your funding plans, the financial targets and the returns you are anticipating. There must also be present an overarching construction strategy and market research to support the claims and proposals you make. The business plan must be strong and relevant and the market research will show the depth of your proposals and support the claims you make when it comes to markets and valuations. A good business plan should inspire confidence in those who read it.
- Access to development finance
Buy to let or Buy to Sell?
Buy to let is simply a property purchase and renovation or new build from the ground up which instead of being sold at completion, is put into the rental market. The rental payments cover the mortgage on the property with the idea that they also provide a bit extra as well. Remember, that as a landlord, you will be required to cover all the maintenance work and costs on the property plus all the checks required by Health and Safety for things like boiler and fire safety and managing your tenant’s behaviour, both good and bad. This is not for everyone. It is possible to pay a letting agency to do this for you but they will charge a fee which could really affect your profit margin.
If you want a long term income line and are not in a hurry to release capital then buy to let is a great option; the rental market is very strong as first-time buyers still struggle to access the purchase market but there can be quite a lot of aggravation associated with managing tenants. You must also plan for inevitable periods when the property is empty.
Buy to sell is also known as ‘flipping’ and the idea is that you buy, renovate and then move property on in a relatively short amount of time. So you need to find a property that needs work, either because it is run down or maybe by adding an extension or loft conversion. The more work required generally then the larger the risk but the bigger the potential profit also. If you are new to property development, it is always better to start more modestly and take fewer risks whilst you learn the process.
If you are renovating or building then staying on top of the costs is absolutely crucial to the success of the project. There should always be leeway built in – commonly 10% – but even despite that, you must stay on top of the costs – projects rarely ever come in under budget. The advantage of flipping is that a good sale will immediately provide you with hard cash for your next project.
Mix and match are also possible so selling a property after a period of buy to rent or using profits from a buy to sell project to invest in a house or homes for buy to let, particularly if the property market is showing signs of slowing down or weakening. Be prepared to change the model as things happen (like Covid) and you may suddenly find yourself wanting to sell quickly or changing your plans from sale to rental. It is important to be flexible. When you are planning a sales figure, always consider what you will do if the market stalls; this could lower your price by as much as 10%. Make sure you have a buffer for the investment and that you have prepared for the worst rather than just hoping for the best. Have a contingency plan for the scenario of what you will do if the property does not sell; make sure there are finance options to take out a buy to let mortgage with a potential rental value that will cover the mortgage repayments by at least 150%. Buy to let or buy to sell? Just remember, that you may need to combine both business models.
Location, location, location
It’s a terrible cliche but oh so true but don’t always feel that you have to buy in the best district in a town or city – the art can be spotting up and coming areas where you can buy low and then sell on a rising curve. Well established areas which are popular with good amenities like schools and transport links will probably already be near their price peak which means you won’t be able to buy low enough to make a decent profit. The trick is to find areas where the prices are modest or low and then buy before they start to soar. If you start close to home, you are more likely to know the different areas well.
Fringe locations are always good as the trend in cities and towns is that the wave usually spreads outwards as people become priced out of the more central areas. Use sites like Rightmove which have excellent and readily available data on the prices of houses sold over the last few years in different areas and postcodes.
Put yourself into the mindset of the target market, what facilities do young professionals or families want? They will differ. Talking to local estate agents and letting agents will help you get a feel for good/bad areas and current trends in buying and renting. Cultivating good relationships with local agents is also helpful when it comes to being first in line when a great new property prospect is just about to go on the market but don’t overlook more unconventional routes like buying at auction. There are some obvious trends; buy to let properties are a great option in cities with a University.
Calculating ROI and Rental Yield
ROI means Return on Investment and it is crucial that you calculate this accurately as it is the only way you can work out whether the project has made a profit or a loss. This is a fairly simple calculation for buy to sell, it is usually the final sale price less your purchase price and the costs of renovation and refurbishment. You should only count the money that you have actually put up when calculating the purchase price. Don’t forget when calculating your costs to include the more hidden charges such as fees for arranging finance, survey fees, estate agents’ costs and utilities like electricity and water for the time the property is for sale and also council tax. ROI on a buy to let is similar, the return is the rental yield; there are lots of online formulas available to help you with these calculations.
Don’t ignore timing, good property developers learn an innate sense of feel for the market and particular locations and properties; they know when to be cautious but can also act swiftly to make a quick and decisive purchase.