"Property development is not easy, but then starting any new business is never easy, no matter how optimistic the entrepreneur is."
Regular pay, reliable hours, five weeks annual leave, and a passable pension – that suits many people. Others dream of unleashing their inner entrepreneur and supercharging their income, perhaps ultimately selling their businesses for six, seven, or eight-figure sums.
If you imagine that there are relatively few people with that kind of ambition, think again. Last year, over 750,000 new companies were registered in the UK. There were even more the year before. But entrepreneurship can have its downsides.
Starting a business is one thing but keeping it going, and making a profit year after year, is something else. Ambition and enthusiasm alone aren’t enough. On average, around 20% of UK businesses fail during their first two years, which rises to 45% after five years and 65% after ten years.
So, what do people routinely get wrong when creating a new business? And is it possible to find a business model that doesn’t suffer from the usual challenges that affect most businesses?
Key questions
To give your business the best possible chance of success there are seven questions you need to consider.
1. Who wants what you’re selling?
One of the rudimentary requirements of any new business is that there must be a market for the product or service it will be introducing. You don’t want to be the next Sinclair C5.
2. Do you need to worry about new technology?
You need to be aware of any up-and-coming technology that could put a dent in your business model? Blockbuster and Blackberry failed to move with the times.
3. Do you have in place everything you will need to see off a direct competitor?
Betamax is considered to have been superior to VHS, but Betamax had issues with support from hardware companies and there were more movies available on VHS.
4. Are there barriers to entry?
There may be a desperate need for a dental practice in your area, but if you’re not a qualified dentist then you will need to employ someone who is, and dentists are in short supply, so you will likely need to pay handsomely for staff.
5. Do you have the necessary credibility?
Customers like to trust a new business before they engage, but how do you gain this trust if you are brand new?
6. Have you thought through your margins and overheads?
You need to consider the cost of employees – not just their salaries and national insurance contributions, there will likely be costs associated with employer responsibilities and following regulations in your sector. These are just a few issues that can impact your margin, and some industries have tighter margins than others.
7. Are there any incentives available?
You should find out if there is any assistance you can take advantage of – this could be grants, tax benefits, or the easing of regulations. These could make all the difference to your venture.
Taking into account these seven questions and the current market, one business model that stands out is small-scale property development. This would involve turning an old shop or office building into new flats.
This may feel like quite a leap, but it is a business that is easily manageable, especially if you already have experience of being a landlord or doing a flip or a refurb. Such a project should comfortably net you a six-figure profit, and it will likely take 18-24 months from when you acquire the property to when you bank the proceeds.
Why small-scale property development fits the bill
Demand
There is a massive housing shortage in the UK. The government’s targets require us to build 300,000 new homes every year, and in recent years we’ve not come close to hitting this figure. And, of course, if we only build 150,000 in one year, the target for the following year must increase to 450,000 to make up for the shortfall. So, if you’re building homes of pretty much any shape or size, it’s fair to say there’s a very healthy demand for what you’re selling.
Technology
We still build houses by glueing bricks together with mortar. There is no requirement for a new home to be built any differently from the millions of other homes that exist all over the country. You might have a few more USB charging points and some underfloor heating in the bathrooms, but the house you build today is in most ways no more advanced than the properties we built years ago. You don’t even have to build it differently from the developer building out a similar project down the road.
Competition
With the demand for new homes high, it’s unlikely that you wouldn’t find buyers for your project – you don’t need to worry about a similar development nearby denying you customers. However, if the market were to tank, you could refinance the project onto a buy-to-let mortgage and then let the units out until the market rebounds.
Barriers to entry
If you decided to develop property today, you could find a property or piece of land to buy from a commercial agent (or just look on Rightmove or Zoopla). Providing that the deal stacks up, getting commercial finance and private investment to fund both the purchase and the development work is relatively straightforward because there is so much money out there looking for a good home.
And when it comes to the skills needed to develop a property, you simply hire these in. Architects, Project Managers, Structural Engineers, and Contractors are all guns for hire and readily available. And, of course, they already know how to develop property.
The skills you need as a developer are people, organisational, management, and decision-making skills. I’m not suggesting that you should dive into property development without getting some training first. But you can see how highly leveraged it is from a skills perspective compared to many other types of business.
Credibility
Your end-user customers (i.e. the people that live in the homes you’ve built) don’t really care about your credibility or experience as a developer. The people you need to impress are property agents, commercial lenders and private investors. The key point to remember is that no one is expecting you to lay any bricks or produce any plans.
You have a contractor and an architect on your team who will do that for you. And if you add up all of the years of experience of your entire team and the number of projects they’ve worked on, you’ll discover that your business is already hugely experienced. The football team may have a new manager (you), but the players on the pitch have been doing their stuff for years and they give you credibility in spades.
Overheads and margins
You might employ a virtual assistant to help you with some of your routine tasks, but because the business model is so highly leveraged, the people that do most of the work are employed by someone else, like your contractor. You’re unlikely to end up hiring anyone yourself.
One of the things that kills many businesses is high fixed overheads and a lack of cash flow. As a developer, your running costs are minimal, plus you can take a break between projects without having to continually feed the overheads.
As for margins, in property development, you will typically target a margin of 20% of the gross development value (GDV): what you sell your finished homes for. For example, convert a shop into ten flats worth £100k each, then your GDV is £1m, and your target margin is £200k. You don’t set this 20% margin figure yourself – it’s a requirement of your commercial lender, who will be lending you most of the funds to acquire the property and pay for its development.
They don’t want you to lose money on the project, so they’ll make sure you’ve got enough profit to ride out a few storms and still end up in the black. You should also have a significant contingency fund to cater for unexpected costs, further protecting you against shirt-losing scenarios.
Incentives
In the case of property development, the government is desperate to get more new homes built and has discovered that the lowest-hanging fruit is converting the many thousands of unused shops and commercial buildings that exist all over the country. They’ve recently expanded the number of permitted development rights to convert these buildings into residential use without full planning permission being required, making it easier than ever to both borrow money and dodge the vagaries of our broken planning system and get out of the blocks.
Summary
Of course, there are many more things to consider when starting a new business, but these are seven essentials. Property development is not easy, but then starting any new business is never easy, no matter how optimistic the entrepreneur is.
Reality always comes to bite at some point along the journey, and often quite hard. The key lies in ensuring you’ve done your homework at the outset and selected a business type and model that takes as much risk out of the equation as possible.
