Property development can bring about a real sense of personal satisfaction. There is a huge amount work that goes into the renovations but there is something about seeing plans unfold and watching a property get a new lease of life that really spurs you on through development. The planning stages themselves can be extremely exciting and the interest in watching how they pan out is something that many a TV show have cashed in on. From Homes under the Hammer to Grand Designs there are a multitude of shows for the intrigued public to delve into and get a sense of the properties out there and interesting ways to develop them into something fresh, useful and even beautiful. For the majority, the interest may be in the potential of their own home or plans for a future home for them and or their family but, for some, interest is peaked to much higher heights by the thought of the income that can come from developing multiple properties. With a strong rental market in the UK, many predicting that rental prices will continue to increase for the next 5 years, developing properties for the purpose of buy to let can be an appealing prospect. For others, the idea of being a landlord and taking a smaller monthly return from their investment is too much of a long game. In that instance, the appeal of ‘flipping’ properties (purchasing properties that need work and then selling them for a tidy profit once they have renovated) can hold real appeal as you get your hands dirty, see the results of your labour relatively quickly and then sell on in time to see a fairly quick return on the investment. Although there are other ways to create a property-based business, these two are the most common routes for those starting up with a property development business.
Developers who go the Buy to Let route, have a great prospect of a steady monthly income and a number of properties to then sell off either for retirement or as they move into different areas of interest. Property development businesses that choose the flip route, see larger lump sums returned to them once the renovations are completed. Usually a developer would aim for between 6 and 12 months. The appeal, in theory then, is clear. However, going into business as a property developer means that you have to have the eye on the prize if you are going to make real profit from either route and there are a number of elements that need to be considered from a finance perspective if a development business is going to turn a substantial profit.
First off, financing…whether you are purchasing a property with the intention of it being a buy to let or a flip a traditional residential mortgage is unlikely to be a viable finance option for you. These types of mortgages are a secured loan that are provided as a long-term financing option for a property you will live in and it could cause issues when selling/renting said property if you take out this kind of finance product. If you go down the flip route for your business, then you will be in a position to pay back the loan in a relatively short period of time so you could consider Bridging Loans for business in this instance as they will give you a more flexible finance options taking into consideration the value and worth of the property itself. The most beneficial aspect of this for a start up business is that because the loan is more reliant on the property deal and less reliant on your past portfolio, which as a start up, you might not have. Buy to Let Mortgages are available to those who want a longer term finance option and come with their own eligibility criteria and restrictions but do tend to have lower interest rates than bridging finance or personal loans.
Secondly, the costs… The interest rates and fees attached to financing the properties can make a huge difference to profit margins, so it is well worth ensuring you know exactly what you are signing up for. If you are considering a bridging loan for your project then it is well worth seeking advice and looking at a tool such a loan calculator that will compare options from a number of leading lenders, Barclays bridging loans are just one of the well respected names you will find quotes from when using this kind of tool.
And, finally, Business type… as a start-up property development business, one of the most important things to consider is how the business will be set up, either as a sole trader or as a limited company with directors. This will affect how you can take money from the profits and there will be different tax implications depending on the path you choose. For example, a sole trader with a mortgaged buy to let property can no longer off set the cost of the mortgage against their tax as an expense, which could make all the difference as to whether a venture will be profitable or not.
This is by no means a comprehensive guide to making a profit or the finance opportunities available to you when you are funding a development business, but it is food for thought and should give you some good ideas of where to start researching. A business plan is a must and the more research that goes into it, the stronger the plan will be. Happy developing!