After a shaky period of uncertainty surrounding pre-Brexit and the general election, the UK housing market has experienced a “new year bounce”. The number of buyers and sellers rose in January as did the number of sales agreed.
Unlike many European countries, the UK has always had a culture that favors property ownership over renting, making property development an attractive investment prospect. Add to this the potential return on investment (ROI) of commercial projects — such as office and retail space, and it’s not hard to understand why many people dream of starting their own property development business.
In this guide, we’ll explore the key steps to starting a property development business.
Create a Solid Business Plan
As with any business, it’s important to lay the foundations and plan before leaping in feet first. If you’re seeking external investment to help fund property development, your plan will need to be top-notch. Even if you have the capital to go it alone, a business plan is essential to ensure your goals are achievable and progress towards them can be monitored.
Consider short and long term goals, your target market, sources of funding, the location and type of property you plan to purchase, timescales and budget. From day one, it is helpful to plan for long-term growth and set project milestones to hit along the way.
Choose a Business Model
A property developer can purchase property as a sole trader or they can opt to set up a limited company to buy a property through. The main difference between the two is how tax is paid.
As a sole trader, capital gains tax will be lower and remortgaging your property will be tax-free. However, managing tax can be complex and income tax could be as high as 40 percent.
As a limited company, a developer can offset interest costs against property income and will only be liable to pay corporation tax on income, which is currently 20 percent. You can reduce tax payments further still, by reinvesting income into other properties. However, taking money out of a limited company can result in a tax liability equaling that of a sole trader.
Buy-To-Let or Buy-To-Sell?
Some property development businesses buy properties to sell and let. However, most — certainly in the early stages — focus on one or the other.
Property developers who focus on buying property to sell seek out renovation projects they can “flip”. The developer buys a property that can be improved in some way. This could mean restoring a dilapidated building to a habitable state or adding value by, for example, converting a loft into an additional bedroom. With house prices predicted to rise by 15.3 percent in the next five years, buying to sell is an attractive prospect.
Buy-to-let is a longer-term commitment. The developer purchases a property that completes any required refurbishment works and rents it out at a price that will cover the mortgage and return a profit. The developer is responsible for maintaining the property and finding tenants unless the services of a letting agency are engaged. The appeal of buy-to-let is the long-term income it provides. However, there may be periods when the property is empty and the developer will need sufficient capital to cover the mortgage during this time.
Secure the Right Property Development Finance
Starting a property development business requires considerable capital from the start. Unless you’re lucky enough to have a very healthy bank balance, you’ll need to research the property development finance available and choose the best option for your needs.
If you’ve identified a property to buy, calculate the estimated cost of the planned project. This should include the purchase price and the cost of any renovations you plan to undertake. Next, work out a realistic estimate of the return on investment (ROI) you can expect, be that a rental income or a sale price. Don’t forget to allow a contingency fund for unexpected costs.
Once you have a good idea of the costs and projected income that can be achieved from a project, explore the finance options available. You may be able to get a standard mortgage to purchase a property. However, traditional lenders often cannot approve a mortgage for the purchase of a buy-to-let property that needs considerable repairs. If you’re relying on the sale of another property to fund the new purchase, you could miss the boat while waiting for the right buyer or for a sale to complete.
Many property developers rely on bridging loans to fund projects when standard loans are unavailable. Bridging loans are much more flexible than mortgages. They can be used to purchase or renovate a property. Bridging finance is offered on a short-term basis, typically four to 12 months and can be available in as little as seven days. Their terms allow a developer to act fast without waiting for an existing property to sell or for the slow wheels of a mortgage application to turn. The loan amount can range from £100k to £2m and often covers 100 percent of the purchase price.
Property development is an exciting and potentially lucrative industry. Making the right start can prevent costly and time-consuming mistakes. Do your research, develop a long-term business plan and make sure you have the necessary finance in place. Follow these steps and you will be well on the way to property development success.