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Saturday, February 27, 2016

Small scale developers need cash

I've carried out a fair few property refurbishments in my time. Everything from a total refurbishment of a 4 bed derelict property to a quick refurb and refresh of a small one bed apartment. I was reminded of some landlords looking to make a quick development property following a chance meeting at the gym with an old friend who was asking me about raising property finance trough his bank.  Small cost developers need to remember that obtaining finance rarely works out as being cheap.  By the time, bridging finance, set up fees and high levels of interest are factored in then even a small loan can have set you back £5-10 k.

Property development strategy

 Partly because of the above, my strategy apart from one failed attempt has always been to refurb to let. The reason been that for this is that for a small scale developer there rarely is enough in the project to make all the hard work worth it. For instance if you take the hypothetical project of a 2 bed apartment which costs £200,000 a reasonable development profit would be between 10 and 15% generating a net profit of between £20,000 and £30,000. For most people the thought of a even £20,000 for 6 months extra work sounds very attractive and well worth doing with an average wage probably being £25k.  Those who remember the charismatic Sarah Beeney and Property Ladder will recall how time after time some hapless amateur developer would make a fortune from doing up a property wreck.  However the reality is that most would have made money because of the rising market and would have often made more by buying an empty property and sitting on it (without the associated work and hassle).

Finance for small scaled property developments

The route for many small scale property developers is to fund the purchase and development through a bank.  This involves obtaining the approval of your bank manager, the payment of a setting fee and then the ongoing premium interest rates whilst the project continues.  As well as the finance fees you will have the usual legal and associated purchase costs.  For 2nd home and buy-to-let purchasers they will face a 3 % surcharge from April 2016.  All these additional purchase and finance costs not to mention the legal costs when selling (estate agent say 1.25% of the selling cost along with legal fees) all mean that to make money from small scale property development without the tailwinds of a rapid rising house prices mean that genuine opportunities are few and far between.  Having said that I'm currently undergoing one myself but with the benefit of cash I'm not under the pressure of having to pay the interest costs on a loan, bridging loan or mortgage whilst the property is empty.  I have also avoided the sizable upfront set up finance fees and any redemption charges.

In the current climate with competition for property development projects being as intense as ever I cannot imagine what it would be like trying to make money without the luxury of having cash to purchase and then refurbish the property.  Cash for small scale single developments is king.  Without it I would not hope to make a reasonable return unless a landlord was looking at the long-term as is the case in a refurbish to let project.

For more advice on other BTL finance

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