Developing property is a popular way to start your own business. Here’s our guide on how to make money from property and become a successful property developer.
Thanks to popular TV shows, setting up a property development business is often seen as a quick way to get rich. But making money from property is more demanding than simply finding cheap properties, renovating them and then selling or renting them at a tidy profit. It takes hard work, quite a bit of risk and changes in the housing market can make it a stressful business.
The good news however, is that starting a property development business is relatively straightforward. No formal qualifications are needed and if you’ve an aptitude for DIY, you can do the renovation work yourself, with the exception of major structural work, electrical and gas jobs.
Property development offers flexible working too. You can update properties in your spare time – working evenings and weekends while still holding down a full-time job, although you’ll need to be available to view and buy properties as well as be on site to supervise tradesmen.
If getting into property development appeals but you don’t fancy the hard work of renovation, then taking a buy-to-let approach with a letting agent to manage rental properties on your behalf can result in a decent income.
The seven steps to becoming a property developer
- How to start property development
- Personal purchase or via a limited company
- Making money from property
- Get your finances in order
- Choose the right property location
- How to buy a property at a competitive price
- Develop for your target buyer or tenant
How to start property development
When starting in property development, it helps to have a plan of action based on your short term or long-term goals. Short-term goals may involve renovating the property for a quick sale, while long-term goals cover rental income and capital growth.
- Buy to let offers a long-term strategy. Over time you can build up a portfolio of rental properties that can provide an income. Buy-to-let mortgages are relatively easy to get as long as you have a deposit of at least 25 per cent. It’s worth knowing that HMRC views income from rented properties as a salary which is therefore subject to income tax. If you’re a higher rate tax payer, you’ll be taxed 40% of any earnings.
- Buy to sell offer a quicker return on your investment. The sooner you can turn around a property, the more profit you’ll make. However, you’re more dependent on market conditions – a falling market can wipe out your profit or even leave you in negative equity. Properties sold incur capital gains tax – currently 18% to 28% with annual exemption of £10,900.
2. Personal purchase or via a limited company
A key question when starting a property development business is whether to buy property personally as a sole trader, or to set up a limited company to purchase property through. It isn’t a straightforward decision, and there are complex tax considerations for each. It’s worth seeking financial advice depending on your property strategy and the type of portfolio you want to operate but in general:
- Advantages of buying through a limited company – Unlike buying personally, you can offset interest costs against rental or property income. You’ll also only pay Corporation Tax on income – currently 20% – whereas personally holding properties mean you could be paying tax on income up to the higher rate of 40%. You can also reinvest income into other properties, effectively reducing your tax liability even further as you are only taxed on end of year profits. However, taking money out of a limited company – either as a salary or dividend – can mean you end up paying nearly as much tax overall.
- Advantages of buying as a private individual – While complex, generally capital gains tax is lower for personal property owners, and this is especially true if you plan to sell property every few years. Remortgaging money on property you own – effectively releasing capital using a remortgage – is tax free compared to extracting money from a limited company that holds the properties.
3. Making money from property
It’s worth developing a business plan and financial forecast so you can accurately see a return on your investment. With interest rates on savings low, it can make sense to make any investment money work hard by buying property.
As a general rule aim for at least a 30% return on investment (ROI) when buying a property to sell on. The 30% ROI should be on top of any renovation, purchase and resell costs. If renovation work is extensive, remember that the percentage you make on the sale of the updated property will need to cover your salary or living expenses during the period you own the property, as well as produce enough of a margin to invest in your next property.
When leasing a property, you need consider its rental yield, which is usually expressed as a percentage. There are several ways to calculate this, but commonly you can divide the total amount of rent minus the running costs (mortgage payments, insurance, maintenance and management fees) by the total amount invested to purchase the property (which should include all fees).
Use this rental yield calculation to help:
[(Monthly rental return (after costs) x 12) / investment] * 100 = yield percentage
As an example, if the monthly rental return was £750 and the initial investment was £225,000, the calculation would be:
(£750 x 12) / £225,000 = 0.04
0.04 x 100 = 4% yield.
In most cases, look for a rental yield of at least 7%. Rental incomes should outstrip mortgage payments by at least 25% to cover maintenance, fees and time when the property is empty – assume it will be empty and not generating revenue for at least one month per year.
4. Get your finances in order
Property development is investment heavy from the start, so you’ll need finance in place – it is difficult to become a property developer with no money. To work out how much is needed, assess how extensive the project is, how long it will take, the costs involved and how much can you sell or rent your property for once developed. Create worst and best case scenarios, and allow at least 30% contingency in case development costs spiral.
Most property developers take out a mortgage on the property they’re buying. Buy-to-let mortgages are readily available, though you’ll need a deposit of around 25% or more, as well as money for mortgage arrangement fees, stamp duty and solicitor fees. From April 2016, landlords looking to purchase buy to let properties face paying an additional 3% stamp duty on property purchases.
Auctions are a good way to get a property bargain – though most auction houses require funds within 28 days of a winning bid. If you buy at auction, look for specialist auction lenders who can release cash fast – some within as little as a week. Other mortgage lenders may give you an agreement in principle before attending an auction.
Housing is particular susceptible to interest rates, consumer confidence, government policies and local developments. When deciding on finance, research the local market, be aware of interest rates, inflation and employment in the area that may adversely impact your investment.
5. Choose the right property location
A property’s location is critical, but you don’t have to buy in the most expensive or the cheapest part of town. Look for an area that’s up and coming, as property here will be cheaper with the potential to deliver the greatest return on your investment over a longer period.
Look for an area with signs of growth and gentrification. Research local authorities and look for news about improved transport links, new shops and local investment. Locations on quiet roads, near public transport, good schools and green areas are ideal but avoid busy, main roads.
6. How to buy a property at a competitive price
In property development, the golden rule is you make your money when you buy – not when you sell. The more you pay for a property, the less profit you’ll make, and this is particularly relevant if you’re selling a property quickly after some refurbishment. You’ll want to pay as little as possible for a property to maximise profit.
- Research the market – check the local property market to ensure you’re paying a sensible price. Compare sold prices for similar properties on property comparison websites. Also check rental values in the area and the number of similar, competing properties for rent. A high number shows the market might be saturated and not worth investing in.
- Consider buying at auction – auctions offer the chance of getting a bargain but it’s all too easy to get carried away with the excitement of bidding and end up with a property in a bad location that needs costly work. Decide a bid limit in advance and stick to it, and always research the property you’re interested in prior to the auction.
- Get a structural survey done – do your homework and check for restrictive covenants as well. Properties in need of restoration may have serious underlying problems that aren’t obvious when viewing, which may end up adding to your costs. If you plan on being a landlord, on-going maintenance and problems will be your responsibility to put right, so a property needing minimal work is a bonus for buy to let.
- Check planning permission – if you’re planning on adding value by extending the property make sure you can get planning permission before you buy, or better yet buy a property that already has planning permission. Check if properties nearby have been extended and in what way, as it gives an idea of what’s possible.
7. Develop for your target buyer or tenant
Renovating a property – either to sell on or to rent out – is costly, and you’ll need to retain focus on your target market and the fact you’re running a business, rather than doing up your own home. Renovating a property to the standards you’d want if you were moving in would be a false economy if your renters are students or you’re selling in a fast-moving market.
Create a realistic renovation budget and stick to it, keeping a tight reign on costs. Tailor refurbishments to your target buyers or tenants, avoiding expensive fixtures and fitting such as luxury kitchens unless you’re aiming for high-end customers. However even with a small budget, don’t scrimp on essentials. Buy appliances, fixtures and fittings that will stand the test of time.
Investing on the exterior of your property will pay dividends. Make sure the outside of your property is well maintained, as many people make up their minds before they’re through the front door.
If you’re making changes to the interior, be careful with layout. Avoid cramming too many bedrooms into a house in a bid to increase profit margins. Always ensure the property’s layout ticks the boxes of your target buyers or renter’s wish list. For example, many families prefer an open plan kitchen diner in preference to cramped separate living rooms, and a tiny box room could be best used for an en-suite.
If you hire a builder and other tradesmen to help renovate your property, choose tradesmen with care, as getting work done well, on time and to budget can impact the ROI. If you don’t already have a team of reliable workers, ask friends and family for their recommendations or look online for reviews on sites such as Checkatrade, RatedPeople and TrustATrader.