"Surprisingly, small-scale property developers typically need a lot less cash behind them than other property investors such as landlords or flippers"
Property development is a broad church. At one end of the property development spectrum, there are huge 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 also vary significantly, from a few thousand pounds to tens (if not hundreds) of millions.
Now, if you’re thinking you could tackle an extension any day of the week but building the next Milton Keynes might be a bit of a stretch for you, then 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 you did.
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 end of the scale in the development world.
Above this level, we start to see the bigger 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 greater economies of scale is not 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.
Not just a game for the wealthy
Now that we know what’s on the property development spectrum, we should probably address another common misconception, namely 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 a lot less cash behind them than other property investors such as landlords or flippers. And that’s because of two key reasons.
Firstly, there’s a whole market of commercial lenders out there who specialise in development finance. 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 small 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 own 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, in my opinion, 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 which allow you to afford a professional project manager to oversee things on-site on your behalf.
So, if you relished the thought of traipsing around your site every other day barking orders at tradespeople and taking your contractor to task about shoddy brickwork or wonky finials, then I’m afraid that you’ll be disappointed and you’re 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 simply 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 be doing all the heavy lifting. This is handy, as they’ve done it hundreds of times before, even if this is your very 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.
Core skills
The first of the core skills I promised to reveal is to be able to run your development as a business. Far too 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 simply 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, and 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 it’s essential to ensure a successful outcome.
The final skill set you will need is good old-fashioned people skills. Property development is a people business and, 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 very important group of people.
These include the commercial agents who will find you deals, the professional team that will bring your project to life, the commercial lenders who will advance you the vast bulk of the money you need and, of course, those private investors that will prevent you 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 be vetting your brick-laying skills, but they will want to have confidence in the person that’s running the show.
Summary
As buy-to-let investing loses its gloss, it’s perhaps unsurprising that many landlords are now switching to development as a core strategy. Many people, landlords included, already possess the skills to develop property. And at the small-scale end of the market, there’s currently a very ripe opportunity for those willing to do so.
