Property development within the UK can be an exciting and lucrative venture, for those seeking to expand their wealth or even establish it as their primary business. Although government regulations, finance updates and unforeseen circumstances such as the pandemic have unquestionably influenced the UK housing market. Creating a somewhat less enticing feeling towards property development than prior years. However, the industry remains a stable long-term investment avenue that can yield substantial returns when executed correctly.
Despite the economic downturn, along with tangible challenges such as material supply chains and costs, as well as difficulties in hiring post-Brexit, there are indicators that the UK property market will persist in growing over the medium term. UK property development still stands as a more dependable option compared to most other sectors.
Although it is crucial to understand the process involved before you embark on your journey. Whether you’re a novice or a seasoned property developer, having a clear understanding of the steps involved can make your project smoother and more successful. This guide aims to provide you with insights into the risks, rewards, and genuine opportunities associated with entering the field of property development.
This property development guide will cover:
- Creating a property development business plan
- Buy-to-let vs buy-to-sell
- Market research
- Calculating ROI/Rental yield
- Renovating for sale or rent
- Financing your property development
- Final thoughts
Property Development Business Plan
To a certain extent all business plans no matter which sector follow a similar structure. Overall, the plan should outline your business objectives and the strategies you’ll employ to achieve them. Begin by defining your goals and objectives for the project. Determine the type of property you want to develop, the target market, and the expected return on investment. Several critical components demand clarity before you embark on any investments.
Start by addressing the following:
- Who is your target market?
- What sort of properties are likely to appeal to your target market?
- How are you going to obtain funding?
- Expected timescales and costs for construction or renovation
There are various property development business plan templates, experts and management software that can help you create your own.
Opting for Building-to-Sell or Building-to-Rent
The next step involves making an informed decision about the specific type of project you want to concentrate on. In order to align with your objectives, thorough research is necessary to determine the most suitable business approach. Build to sell or build to rent. These represent two lucrative property development business models. However, the decision between the two is crucial.
Building to Sell
Under the building-to-sell model, your aim is to construct one or more properties for the purpose of selling them. After successfully completing a project, your focus turns to selling the property for a profit. You may also consider purchasing a substandard property, renovating it to a high standard, and then selling it for a profit. These approaches yield returns through capital gain, typically selling at a higher price than your total construction costs. Many developers using this method transition from property development financing to development exit financing to minimise interest expenses.
Building to Rent
This business model is centred on constructing a property with the intention of renting it out. Building-to-rent aims to establish a consistent, long-term income stream. Depending on your rental agreement, you can expect a fixed, regular income from the property. However, this model necessitates diligent property maintenance to preserve its value. Including arranging for repairs, ensuring that things like the smoke detector and boiler are regularly inspected, and potentially even finding tenants and checking their references and credit scores. It provides extended term returns but may pose challenges in securing funds for your next project.
It’s worth noting that you can transition between different property investment models. For instance, you might decide to sell a property after renting it for several years or use the gains from a buy-and-sell property to venture into a buy-and-hold investment.
Market Research
Before any investments take place, it is vital to conduct thorough financial analysis and gain a clear understanding of the real estate landscape in your chosen area. Familiarise yourself with the preferences of potential buyers or renters in that area and determine your budget for property acquisition. Commencing your property investment journey in a nearby location is often wise due to your familiarity with the local area. However, you might also consider exploring more distant areas to discover which have significant growth potential. Search for regions where properties are in high demand, sell swiftly, and show signs of active construction or investment, as these are promising indicators of an area on the rise.
The Significance of Location
The key is to identify areas just on the verge of becoming popular, where housing prices are poised to rise. Look for locations situated at the outskirts of bustling urban areas or for buy-to-let investments, university cities are a favourable choice. Websites like Rightmove offer easily accessible data on the selling prices of houses in various areas.
Always put yourself in the shoes of your target audience. Accessibility to transportation is crucial, as young professionals and students seek proximity to bars and restaurants, while families prioritise safety and access to quality schools.
Establish connections with local real estate agents who possess insights into the preferences of potential buyers and renters in the area. Regularly check in to cultivate personal relationships that ensure you’re the first to be informed when suitable properties become available.
Financing Your Property Development
Next you need to establish a budget for your project, including acquisition costs, construction expenses, and any other associated costs. Seek financing options and secure the necessary funding. There are various options for property development finance from bridging loans, development finance and mortgages. Here are just 4 options you can start to consider.
- Property Development Finance: Development finance is a type of lending that helps businesses, entrepreneurs, and property developers to access funding for development projects – both residential and commercial. BLG offers both seasoned developers and those just starting, development loans from £1,000,000 to £15,000,000.
- Bridging Loan: Bridging loans are short-term, high-interest loans often used by individuals needing to acquire a property while waiting to sell another. Property developers also favour these loans, using them to purchase, renovate, and subsequently sell properties, repaying the loan and interest in the process. These loans are secured, making them most suitable for those who have property or land that can serve as collateral. A clear exit plan, outlining how the loan will be repaid at the term’s end, is essential. BLG offer property developers loans from £500,000 to £10,000,000 up to 12 months but longer term can be considered.
- Buy-to-Let Mortgage: If your intention is to rent out a property after purchase, you can’t rely on a standard mortgage. Instead, you’ll need a buy-to-let mortgage. These typically come with an interest-only structure, larger deposit requirements, higher interest rates, and increased fees compared to standard mortgages.
- Buy-to-Sell Mortgage: Standard mortgages are not suitable for those looking to buy, renovate, and quickly sell a property. Opt for a buy-to-sell or flexible mortgage, which allows for a shorter holding period. However, this convenience comes at the cost of higher interest rates, elevated fees, and a significantly larger deposit.
Summary
Property development can be an exceptionally profitable and fulfilling pursuit. While it requires dedication, instinct, and skill to excel in it, it’s a field accessible to anyone willing to learn. By following these steps, you can navigate the property development process with confidence and increase your chances of a successful and profitable venture. Keep in mind that each project is unique, and flexibility is essential when adapting to unforeseen challenges.
Securing development finance is a relatively straightforward process. If you’re considering a deeper involvement in this field, our advisors and team at BLG are ready to offer free, no-obligation guidance whenever you require it. Contact us today to find out more.
