THE Five MOST COMMON QUESTIONS EVERY FIRST-TIME PROPERTY DEVELOPER ASKS
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The Five Most Common Questions Every First-Time Property Developer Asks

The Five Most Common Questions Every First-Time Property Developer Asks. 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. Rictchie will explore the five most common questions every first-time property developer asks. Historically, property development has been viewed as the domain of the wealthy, the brave, or even the foolhardy. However, the last few years have seen a significant shift in people’s perspectives, with small-scale property development being the current property investment strategy of choice. So, what are the key questions that those thinking of dipping their toes into the water ask?

The Five Most Common Questions Every First-Time Property Developer Asks

The UK property sector has long been synonymous with buy-to-rent investments, where individuals and investors purchase properties with the sole purpose of generating rental income. However, there has been a noticeable shift within the industry in recent years. A growing number of individuals and investors are now turning their attention to small-scale property development as an alternative avenue for wealth creation.

A typical small-scale property development project will see a commercial building such as an office, shop, or light industrial unit converted into residential flats. It could be as simple as converting a small office building or the upstairs storage areas in a shop. You’re likely to be building between four and 20 units, and you’ll typically be looking to target a profit of between £100,000 and £500,000 per project, each lasting 12-24 months or so.

So, if small-scale property development is the current property investment strategy of choice, what are the key questions that those thinking of pursuing it ask?

Here are the top five:

How Much Money Do I Need To Develop Property?

Let’s compare two examples side-by-side.

Imagine you were buying a £400,000 buy-to-let property. You’d typically put down a 25% deposit, which is £100,000. On top of that, you’d have assorted purchase fees, plus you may need to do some work on the property before you rent it out – let’s call it another £40,000 in total, making your total cash investment around £140,000.

Now, let’s look at a small development project. Suppose you’ve bought an empty shop for £400,000 and want to put four flats above it. We’ll also assume that the cost of doing this conversion (including all construction costs, finance costs and professional fees) is another £400,000. So, on paper, that’s an £800,000 investment, which is much greater than our buy-to-let scenario. But this is often as far as people get, and they fail to appreciate where the money comes from.

Development

Development is supported by an industry of commercial finance providers who specialise in funding developers. Those lenders will typically lend up to 70% of the purchase price of the shop, in our example, leaving you as the developer to fund the deposit of £120,000. But here’s where you have your first big win; these commercial lenders are happy for you to borrow the bulk of this deposit from private investors – it doesn’t need to be all your own money. That said, they will almost certainly want you to have some skin in the game – for example, you may need to put in 10% of the deposit yourself (in our example, that would be £12,000), but you can borrow the balance from other investors.

Of course, there’s the issue of the £400,000 you need to do the development work. This is where you encounter your second significant and somewhat surprising win: the same commercial lender who advanced you 70% of the purchase price will also be happy to lend you 100% of the development cost.

Let’s say your buy-to-let property doubles in value over the next 10-15 years and nets you a £360,000 profit from your £140,000 investment. But our shop conversion will target a £200,000 profit over 12-24 months for an investment of just £12,000. From a financial leverage perspective, it’s in a completely different league. And, of course, these lenders want to lend you money because it’s immensely profitable for them – that’s the beauty of development. Plus, they will insist you target a minimum 20% margin for yourself because they’ll want to ensure you don’t lose money.

How Do I Find People To Work With Me On My Very First Development?

This is an understandable question. As a new developer, you’ll enter a world where everyone else knows a great deal, and you know very little. You’ll feel like you’ve got the ‘L’ plates on, and it will be fair game for unscrupulous contractors. Or will you?

Part of the answer here involves a mindset shift. In development, it is the developer who creates all the wealth. No one gets paid unless the developer decides to develop. So, you’re the boss, the entrepreneur looking to take advantage of a business opportunity. The other beauty of development is that it’s highly leveraged. As the developer, you don’t lay bricks, design flats or even choose curtains. You employ an army of professionals to do those things for you. You’ll have an architect, contractor, structural engineer, planning consultant, and many other specialists, each of whom has decades of experience in development. When people look at your team’s CV, they’ll see a group with centuries of experience who have completed thousands of projects.

But how can you manage this experienced team if you’re a first-time developer?

This is another massive benefit of small-scale development. Because you have a six-figure development budget (albeit none of it is your own money), you can afford to hire a professional project manager (PM) to oversee the build on your behalf. They’ll be the ones who go to the site each week and will ensure your contractor delivers. And they’ve seen it all before – no fast ones will be pulled. You have a weekly phone call with your PM to keep yourself up to speed and to make any necessary decisions. You become the CEO of the outfit rather than the site project manager. And that means less work for you – and also far less risk.

How Can I Find A Profitable Project?

One of the big attractions of development – and commercial conversions in particular – is that your source buildings do not have a fixed value. Let’s take a run-down commercial building. It might be worth £100k to someone who wants it for their business. Still, because you’ll convert it to residential, you’ll get a considerable uplift, meaning you can pay significantly more than its commercial use value. This is great, but you’ll be against other developers looking to do the same thing. This is where a little expert knowledge goes a long way. Imagine that other developers could get five flats into the building, but I showed you a way you could get six. With a 20% profit margin, all their profit is in their fifth flat. But your profit is in flats five AND six, allowing you to outbid the competition.

One of the significant advantages here is that, in development, people tend to stick to what they know. Most established SME developers focus on new builds rather than conversions. Knowing how to unlock the hidden value in a building isn’t a case of having decades of experience – it’s simply knowing tips and tricks that other people don’t know – plus having a solid understanding of what’s possible using permitted development rights (PDRs). So, get yourself properly trained and gain up, and you can get a massive edge over your competition. You won’t just avoid the pitfalls; you’ll see many more opportunities, too.

Why Would Anyone Want To Work With You?

Remember that your money is as good as anyone else’s. Building professionals will be paid regardless of whether you achieve your profit goals or not, so being a first-time developer doesn’t make you a risk. But it gives you an opportunity; if they do an excellent job for you, you will likely employ them for your next project(s). Building professionals must move on to fresh projects to keep making money.

The same goes for lenders and commercial estate agents. They make money from what you do and will want to work with you because that’s how they get paid.

How Can I Guarantee I Won’t Lose Any Money?

This is also an easy question to answer. In short, you can’t. Property investing is a risk-and-reward business, so there are no guarantees. But there are a lot of things that you can do to reduce your risk significantly. The first thing to remember is that you should always be targeting a 20% profit margin. That way, even if the market moves against you, you shouldn’t end up making a loss. Your commercial lender will only lend you the money if they believe the deal makes a 20% profit, which gives you added comfort. You’ll also have a 10-15% contingency fund for your build cost to allow for unexpected costs. Also, get yourself properly trained; most mistakes that new developers make are wholly avoidable – a simple case of ‘they didn’t know what they didn’t know’ – so don’t be a ‘have a go’ developer.

The critical thing to do is to do your due diligence before you commit to a project. Find out precisely what’s involved in developing a building and where the best opportunities lie. You can use the QR code below to access a free webinar where I put more meat on the bones.

The second thing I would recommend is getting yourself adequately trained. There are big profits to be made in development, but you don’t want to fall into any holes—and there are plenty of them if you don’t know what to look out for. The investment in training should pay you back manifold on just your first project.

I hope you enjoyed that.

Talk soon.

About The Author

Ritchie Clapson CEng MIStructE is a veteran property developer of 40+ years, an author, industry commentator, and co-founder of the leading property development training company propertyCEO. Ritchie is passionate about tackling the lack of housing in the UK and helping ordinary people to be part of the solution. To discover how you can get into property development, visit www.propertyceo.co.uk

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Working with Strong women, I help empower women not to give up on their goals and find true happiness within themselves. #lifestyle #womenempowerment #selfcare

9 Comments

  • Kat

    Great article! It’s insightful to see the shift towards small-scale property development. The breakdown of investment costs and leveraging commercial lenders really clarifies the financial aspect. Can’t wait to learn more about finding profitable projects and risk mitigation strategies!

  • Emily

    I’ve never considered being a home developer, but now this has been considered an option. It seems like a great opportunity for investment and growing your wealth!

  • Hannah Bures

    This is such an interesting read! It has been very educational! I do not plan on purchasing this but feel well informed and feel as if I could help out a friend or family member now.

  • Ramil Hinolan

    If you want to put your feet into a small-scale property development project, this article is for you. I appreciate the financing side, which helps developers decide whether to pursue the project or not.

  • Stephanie

    As always, excellent information on this site. This article is a ‘must-read’ for anyone considering developing a property.

  • Kimberley Asante

    This article about the most common questions first-time property developers ask is incredibly insightful! As someone who’s interested in real estate, I found your breakdown of key considerations and potential challenges very informative. It’s great to have all these important questions addressed in one place, making it easier for newcomers to navigate the property development process. Thanks for sharing such valuable insights!

  • Beth

    I feel like finding a profitable project is probably harder than you would think, so I’m glad you included that. We were actually approached about investing in a property development project, so this was perfect timing.

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