From Builder to Developer: Everything you should know to get into Property Development

You’ve built houses for other people, you may have even built your own house, but how do you make the transition to property development and add value to land or a property and most importantly make a profit from your development.

At first glance, property development may seem like a quick way to supplement your income, but with increasing legislation and profit margins squeezed, it is important to go into it with your eyes wide open.

In this blog, we talk about what you should have in place before you even consider taking the leap and getting into Property Development.

First Steps

Speak to a broker so that you can get an understanding of what level of funding you need to start your first development project. Knowledge of types of finance that are available to you,  plus the advantages, disadvantages and which will be best suited to your needs. 

However, before taking out any finance, you will need to ensure that you have built up a deposit fund for your project or alternatively you have secured an investor. 

How to Source Property Development Opportunities 

It is vital that you create a professional network by building relationships with local estate and land agents. It is useful to connect with people via social media such as LinkedIn, Instagram and Facebook but also important to visit people face-to-face  and build rapport with local  estate agency owners. Ideally, you will be presented with land and property opportunities before they go to the open market. This should be reinforced by keeping abreast of industry news and the local property market.

Due Diligence

As opportunities arise, ensure you carry out due diligence on each potential development scheme, such as:

• Researching comparables – what is your asset worth and what can you buy the asset for?
• What are the fixed costs? – stamp duty, broker, legal, planning and license fees
• What is the scheme/development/project going to cost? Put the project out to tender to at least three contractors unless you intend to carry out the work yourself
• Speak to a development consultant at an estate agent – ask them to provide a valuation for the development. This is called the Gross Development Value (GDV)
• Calculate your ‘worst case’ profit position, in other words what is the minimum profit you expect to make from the development. Generally lenders look for a 20% profit margin on each deal
• Set up your core team –  this should comprise a commercial property lawyer, a specialist real estate accountant, and a specialist broker. Arrange a call with this team so you can discuss the best way to purchase the asset and are aware of any tax implications 

Planning

Depending on the type of project, it is important that full planning permission and approvals are in place, prior to completing the financial transaction on the asset, as it will maximise your profit margin. Being in a position to start building work on day one will cost you less in interest and fees.

Who will develop the land or property?

A huge amount can be saved by either undertaking building works yourself or project managing a team of individual trades. Although this will be cheaper, it is very time consuming and ensuring that the correct trades arrive at the right time can be challenging, particularly if you don’t have a background or experience in project management.  The other option is to engage a main contractor. However, when using a main contractor you may pay 10-20% more and it is important to explore these options depending on the size of the project, your experience and available funds. Choose the option which suits your situation and project.

How do property developers fund projects?

Property developers will usually fund projects using three different types of finance.

Read our 3 different ways to fund property development blog.

1. Development Finance

Development Finance is a type of finance which will cover a percentage of the land cost, the total build cost and professional fees. Some lenders will differ slightly, depending on their specific criteria and appetite for your project. 

 If you are an experienced developer, with a good track record, lenders will see this as mitigating risk  and you will often have access to more competitive financial packages. Development finance is the only type of finance available on ground-up developments, however it is possible to have Mezzanine finance on top of this to lower the cash input required from the developer. Specialist development finance lenders will lend a set loan to value (LTV) against the gross development value (GDV) and will also have a maximum loan to cost ratio when calculating the total facility available.  

2. Bridging Finance

Bridging finance is usually only used when acquiring a development site or property and often when things need to move quickly. Bridging Finance only covers the purchase and cannot be used to pay for any of the building works. Interest can be paid monthly, rolled up and paid at the end of the term or deducted from the loan on day 1.  The latter will impact the day 1 loan you receive as it is deducted from the total facility at the beginning of your agreement.. 

3. Refurbishment Loan

A refurbishment loan  is used for refurbishment schemes and works much like a bridging loan, however unlike bridging finance, it will cover 100% of the planned works and up to 70% of the initial purchase. Interest can be serviced in the same way as bridging finance; monthly, rolled up and paid at the end or deducted at the outset. 

Read 3 ways to fund property development.

What skills do you need to be a property developer?

Many individuals who choose property development as a career, have a love and passion for property, are specialist tradesmen or builders who wish  to complete their own projects rather than working for customers. 

Most skills can be learnt, however due diligence is key to make sure each financial deal stacks up and you should always consider your worst case position. For example an asset that can be sold or retained gives you more exit strategies which can help in a market where there is not as much certainty. A key team of professionals around you will mean that every base is covered and you are mitigating your risk.