Becoming a Property Developer
If you’re looking to build a property portfolio, then this guide may be just what you’re looking for to get your property business on the road to success.
It’s been a while since we’ve been able to look at the property market and say that things are looking up, but it would appear, that now is as good a time as any to get a property development project going.
With government schemes like Help to Buy and Funding for Lending providing finance for potential buyers, now is the ideal time for you to get yourself on the property ladder.
Develop a business plan.
Whatever the intentions behind your property business ideas, its always a good idea to start things off the right way – by having a business plan. You’ll need to have achievable and realistic goals set for what you’re hoping to gain from this business venture. Give yourself some step-by-step objectives to achieve, and be as specific as you can.
It’s also vital to bear in mind the resources you might potentially need. So, if you think that you’re likely going to need staff, then you will need to keep things legal and employ the help of HR agencies or payroll service providers. One of the biggest costs may come from marketing your business, you need to consider costs like web-design and marketing campaigns. Most companies choose to outsource these when they’re first starting out.
To Buy or to Sell?
In your business plan its important that you highlight what your exit strategy will be. Are you going to buy-to-let or buy and sell? Buy-to-let offers you more longevity and will allow you to build a far more extensive property portfolio. Eventually this could be enough to supplement or even replace your current salary. Whilst this does look like an attractive venture because Buy-to-let mortgages are easily available, it’s worth noting that HMRC views any income that comes from rented properties as a salary and you may be taxed up to 40% on any earnings.
On the other hand, you always have the short-term option of buying and selling, which offers to increase your capital more rapidly. This is a riskier strategy as market conditions are beyond your control but they will dictate the return on your investment. However, buying to sell offers a more instant return-on-investment. Properties sold will incur capital gains tax; of course that depends on your income, with an annual exemption of £10,900. Currently, its between 18% and 28% of your income.
If a buy-to-let strategy is the way forward for you, then considering the rental yield is vital. Even if your plan is to eventually sell, you need to be prepared for the volatility of the housing market. It’s important to remember that in a recession you could potentially be left with a property that you’re unable to sell. To calculate rental yield, you need to measure the annual rental income against the value of the property. The average is around 10% but can increase with multiple occupants, like student lettings for example. If you’re considering selling your property you need to be aiming for a 30% return on your capital.
It’s all about the Location!
Although it sounds like a cliché, the phrase ‘location, location, location’ stands to reason. The idea is to buy in an area on the rise, not in an already established area. This is the secret to making a substantial profit. Aim for areas of growth and gentrification, a place where there are already other projects going on.
Avoid over paying
It’s absolutely essential to make sure that you have thoroughly researched the area you are planning to buy into – ensuring that you buy at a sensible price. Remember that in this business the profit comes from the purchase price, not the sale price. For research, websites like Zoopla and Rightmove are invaluable in helping you compare property prices in your area. Be on the look out for structural issues or noisy neighbours, because these are factors that could have affected the asking price, and could impact your selling price in the future.
Timing is everything!
It’s easy to get carried away and rush into buying a property, especially if you’re dealing with pushy estate agents. But like mentioned above, research is everything, and research takes time. Get to know the area and most importantly, the market. Having said that, once you have found the ideal property development in a good location it does help to move quickly. Because the quicker you can buy the property, the quicker you can get to work on it and the sooner you can make a return on your initial investment.
Think of your buyers/renters
When renovating you have got to keep your buyers or renters in mind. What is in demand in the area? Is this an area for students? Families? Is it worth focusing on a large, high-spec kitchen if you’re target buyers are single professionals? Its easy to get lost in the project and start building to your needs, but in order to stay in budget, you’ve got to consider the buyers/renters first and foremost.
Plan, plan, plan
Let’s be honest, becoming a property developer isn’t a cheap vocation. You’re going to need a lot of money. You also need to consider that until you sell your first property you will be financially stuck, potentially unable to expand. Therefore, it is vital to ensure that you are able to raise the finance necessary for your project.