With property in the UK tipped to rise 25% over the next five years and the introduction of government schemes such as the Help to Buy and Funding for Lending providing greater access to finance for buyers, now could be the perfect time to start a property development business.
If you’re keen to catch the UK market on a fast upward streak, read our eight simple steps to property development success and get scouting for the perfect investment opportunities now.
1. Develop a property development business plan
Even if you’re planning on starting a property development business part-time, and aren’t sure if it will become a full-time business or just an additional way to make cash, it’s still sensible to have a property development business plan. You need to set specific and targeted goals about what you want to achieve from your property venture as well as step-by-step outlines of how you will achieve your objectives.
2. Buy-to-let or buy and sell
One of the key targets you’ll need to identify in your business plan is your exit strategy, is your plan to buy-to-let or to buy and sell? Buy-to-let offers a more long-term strategy, and enables you to build up an extended property portfolio in order to supplement, or eventually replace, your current salary. Buy-to-let mortgages are readily available, but you need to bear in mind that HMRC views income generated from rented properties as a salary and therefore it’s treated like income tax. If your tax is classed as ‘higher rate’ you will be taxed 40% of any earnings.
Buying and selling offers a more short-term strategy to quickly increase your capital. You are much more dependent on market conditions and it is certainly more risky – although it does offer a more instant return-on-investment. Properties sold incur capital gains tax which is currently between 18% and 28% dependent on income, with an annual exemption of £10,900.
3. Always consider the rental yield and return-on-investment
If you’re planning on a buy-to-let strategy, the rental yield is essential, but even if you’re hoping to sell you have to be prepared for a volatile market and in a recession you could get stuck with property you can’t shift. Rental yield is calculated by measuring annual rental income against the value of the property. 10% is considered a good gross yield and this can increase dramatically with multiple occupants (student lets for instance). When selling properties you need to aim for a minimum of a 30% return on your capital.
4. Location, location, location
Arguably one of the most overused phrases in property development – but it really is all about the location. Not that you want to buy in a location that’s already deemed great (a common mistake), you need to be able to spot an area that’s on the rise and buy early, when there’s the greatest chance of making a healthy profit. Look for areas of growth and gentrification where other developments are taking place or are planned.
5. Don’t pay over the odds
Market research is essential to ensure you buy at a sensible price, in property development you make more money when you buy than when you sell so negotiate hard when it comes to the asking price. Sites such as Right Move and Zoopla can help you compare prices in a certain area. You also need to be wary of structural issues or other external factors such as unruly neighbours which could have an impact on a property’s value. Without sounding pessimistic, you need to always consider the worst case scenario, if you still think it’s a worthwhile investment – it probably is.
6. Timing is crucial
It’s important you don’t rush into buying a property. It can be easy to get swept away by estate agents who insist you’ll be missing out on the best deal ever if you don’t buy ‘x’ immediately but you need to spend adequate time getting to know the market and area. However, once you have found a suitable property in the right location, it pays to move quickly. The quicker you can turn a property around the better, as the sooner it’s finished the sooner you can make a return on your investment.
7. Tailor your developments for your buyers (or renters)
It’s essential to tailor your development to the demand in the area you’re buying in (a key issue to address in your business plan). Is the local market students for families? Is it worth creating a very high-spec property or will simple fittings be more suitable? It’s all too easy to go over budget creating your dream property but you need to keep a tight grasp on your finances with your target buyer or renter constantly in mind.
8. Ensure you have suitable property development finance in place
Becoming a property developer requires money, and lots of it. You also need to bear in mind that until you sell your first property your money will be tied up leaving you unable to grow or expand. It’s essential to ensure you’ll be able to raise the necessary finance you’ll need. Banks will have dedicated property finance experts that can advise you on available and suitable funds.