Do You Have What It Takes To Be A Property Developer? Hello everyone, I hope you are well. In today’s post, I will be sharing a guest post from property development expert Ritchie Clapson CEng MIStructE, co-founder of propertyCEO. Ritchie will explore what it takes to be a small-scale property developer as a side hustle. What sort of stuff are property developers made of? Is it all about fast cars, thrusting entrepreneurship and the art of wheeler-dealing? Or perhaps you’re sensing more of the behind-the-scenes wealthy investor type.
A bit quieter and less bold, with a dark blue Ferrari on the drive instead of a bright red one. Most people have a few misconceptions about the world of property development and the people who participate in it. During his forty-odd years in the business, Ritchie has encountered a few people who fit the more common stereotypes. Still, most are ordinary, run-of-the-mill characters – just like you and me. So, what does it take to be a property developer on the side?
Do You Have What It Takes To Be A Property Developer?
Of exactly what sort of stuff are property developers made? Is it all about fast cars, thrusting entrepreneurship and the art of wheeler-dealing? Or perhaps you’re sensing more of the behind-the-scenes wealthy investor type. A bit quieter and less brash, with a dark blue Ferrari on the drive instead of a bright red one. So, if you were to close your eyes and try and conjure up a property developer in your imagination, what sort of person would you be looking at?
Most people need to learn about the world of property development and the people who participate in it. During my forty-odd years in the business, I’ve encountered a few people who fit the more common stereotypes. Still, you may be surprised to learn that most are. In fact, you’d struggle to point out the ordinary and run-of-the-mill characters in an identity parade. And most people fail to spot them because they have a big misconception about what exactly property development is in the first place, so perhaps that is where we should start.
Property Development Is A Broad Church
At one end of the property development spectrum, there are massive projects such as building housing estates or even new towns, and at the other end, there is adding an extension to your home. The budgets vary significantly, from a few thousand pounds to tens (if not hundreds) of millions.
Now, if you think you could tackle an extension any day of the week, building the next Milton Keynes might be a bit of a stretch. You won’t be surprised to know that you’re in the significant majority – so hold that thought because you may have more development potential than you thought.
So, if we make extending a property the bottom rung of our development ladder, the next step up would be a flip (refurbishing a property and selling it at a profit) or a buy-to-let doer upper (sprucing up a rental property and adding a new kitchen, bathroom, etc.). These are straightforward projects with a relatively modest budget, where you’re likely to oversee the on-site work yourself if not actively wielding a paintbrush.
The next rung up the ladder is ‘small-scale’ development. This is where we either create a small number of new-build properties or take an existing small commercial building and convert it into flats or houses. It could be turning a small office building into apartments or putting flats above a shop. Typically, we’re looking at building four to twenty units and would target a profit of between £100k and £500k. For my money, this is the sweet spot – the numbers are very attractive from a personal point of view, yet these jobs still sit very much at the bottom of the scale in the development world.
Above this level, we start to see the more prominent players get involved, so the market becomes more competitive and less attractive for individual investors, particularly those new to it. Competing against more experienced companies with deeper pockets and more significant economies of scale is different from where most would want to be, but then do you need to if you can make a healthy six figures from doing something relatively small? Step further up the ladder again, and you reach the lofty heights of the larger regional housebuilders and, finally, the nationals, such as Persimmon and Taylor Wimpey, where things operate more corporately.
Property Development Isn’t Just For The Wealthy
Now that we know what’s on the property development spectrum, we should probably address another common misconception: that all property developers must be wealthy. Given that a small development scheme might still produce a six-figure profit, it’s an easy assumption. After all, surely developers need to sink some big bucks into their projects to get these sparkling returns?
Surprisingly, small-scale property developers typically need much less cash behind them than other property investors such as landlords or flippers. And that’s because of two key reasons.
Firstly, a whole market of commercial lenders specialising in development finance exists. They will typically lend developers (including first-time developers) up to 70% of the land/property purchase price, and then the same lender will also fund 100% of the development costs.
The second reason is that these lenders allow developers to borrow much of their deposit from private investors (who are paid a handsome return for doing so). Lenders usually like the developer to have some skin in the game, but it’s typically a tiny fraction of the overall total. Compared to the average buy-to-let deposit, which is currently around £70k, small-scale developers are usually required to put in a far smaller amount of their funds. So, yes, you need money to fund a development project, but most of it is someone else’s.
Who Are Property Developers?
What sort of individual is likely to thrive in this domain? Only four fundamental skills are required, and you must have all of them. But before I reveal what they are, it’s worth looking at the environment that small-scale developers have to operate in, as, again, it’s different from many people’s expectations. I mentioned that people who flip, refurbish, or otherwise do up a property inevitably manage those projects personally, often getting their hands dirty to keep down costs. With small-scale development, the development budget will be at least six figures, allowing you to afford a professional project manager to oversee things on-site.
So, suppose you relished hiking around your site every other day, barking orders at tradespeople and taking your contractor to task about shoddy brickwork or wonky finials. In that case, I’m afraid you’ll be disappointed and in the minority. Most people would reasonably prefer to be well out of the firing line when it comes to on-site critiquing simply because it’s an alien environment.
How much more pleasant to have a project manager who knows all the tricks of the trade do your critiquing for you and represent your interests? You’ll chat with them weekly, and they’ll bring you up to speed on progress and get any necessary input from you that they need. It’s a lot more civilised.
But more than that, it means you take on more of an executive role. Yes, you’re the ship’s captain, but you don’t need to take the wheel or fire up the engines. You’ll have a team of professionals working for you, including an architect, contractor, structural engineer, and your PM, who will do all the heavy lifting. This is handy, as they’ve done it hundreds of times before, even if this is your first project.
As a result, the skills you need in this type of development are more akin to that of a chief executive officer or CEO. Your job is to find a project, crunch the numbers, arrange the finance, and build a team to deliver it.
Skills You Must Have
So, precisely what are these core skills that I earlier promised to reveal?
Well, the first is to be able to run your development as a business. Many first-time developers fail to operate their venture as a business, so they can all too often come unstuck. Being business-minded does not mean having pots of business experience – you need to know and apply the fundamentals.
The second skill set you’ll require is organisational skills. While it will be other people’s job to manage things on-site, you still need to find and analyse potential deals. This isn’t simply a case of taking five minutes to pluck one off Rightmove or Estates Gazette. You’ll potentially have to kiss quite a few frogs, which means managing a large pipeline of opportunities. This can quickly become an unholy mess if you lack any organisational skills.
The third skill set you’ll need is good management skills. Property development must be just about the most highly leveraged business there is. However, it is still incumbent on you as the developer to call the shots and make the executive decisions. You can’t simply sit back and collect a cheque at the end; you need to manage the people that are managing your project. Again, this is very much CEO territory, but ensuring a successful outcome is essential.
The final skill set you will need is good old-fashioned people skills. Property development is a people business. While much of the developer’s work can be done from the comfort of a home laptop outside office hours. Your success will ultimately depend on the relationships you establish with a small but significant group of people.
These include the commercial agents who will find you deals and the professional team to bring your project to life. The commercial lenders will advance you the vast bulk of the money you need, and, of course, those private investors will prevent you from having to fund the entire deposit yourself. All these people have money riding on their relationship with you, and you must be able to inspire their trust in your ability to deliver a project by playing your CEO role successfully and professionally. No one will vet your brick-laying skills, but they want confidence in the person running the show.
I hope you enjoyed that.
ABOUT THE AUTHOR
Ritchie Clapson CEng MIStructE is an established developer, author, industry commentator, and co-founder of the leading property development training company propertyCEO. To discover how you can get into property development, visit www.propertyceo.co.uk