If you’re considering getting into property development, then you’re certainly not alone. Over the past few years, the property market in the UK has exploded even with the pandemic economy in the middle of it all.
Across most of the UK in 2020 the average property price rose by more than 8% which, all things considered, is a phenomenal return compared to high street savings rates or other investments that you could make.
With government incentives introduces in recent years, as well as a real and lasting lack of new property supply, this has meant that demand has shot through the roof and UK property is now one of the most successful and sought after markets in the world.
It’s not by any means an easy pursuit, however, it is extremely lucrative and can also be very rewarding too.
With many of our clients approaching us about how to get into property development, we’ve put together a real estate development guide for you here to give you some more information about what it entails.
There are, generally speaking, three routes this usually takes in that you can either choose to purchase and develop an existing property before selling it on, purchase and develop an existing property and keep it as a buy to let property, or you can purchase land and look to build a property from scratch. All are lucrative and, whilst not easy, probably easier than most would think.
We also offer free advice should you want to get in touch with one of our team who can talk you through what you may need.
Property development guide
We’ve put this together in order to answer your questions about how to get into property development. It’s not a comprehensive guide about property development but should give you enough information to be able to see what’s involved if you’re looking at getting started
We’ll look at things such as whether you should operate as an individual or a company, what’s involved in the process, the advantages, and how to finance a property development.
Ultimately, property development comes down to having an instinct for property that has potential and being able to spot good opportunities. The actual skill and experience requirement for being able to do the building work is largely down to budgeting and getting quality contractors in so that your profit margin is solid.
Finally, your choice about whether to keep the property as a buy to let investment or to sell it on into the market for a profit will also influence this, but it’s something we’ll cover.
Setting up a property development company
In the UK it’s often more tax efficient to set up a specific company for investing in and developing property.
As an individual if you invest in and develop property then you’re liable for capital gains tax and other income taxes on the profit and would be required to declare these profits on a self-declaration tax form with HMRC. With that in mind it often means that you’d pay significantly more tax than if you were to operate as a business.
There are two ways you can do this; you can either operate as a limited company like any other business in the UK or you can create a Special Purpose Vehicle company, also known as an SPV.
If you operate as a standard LTD UK company then that means you’re liable for the usual rates of corporation tax and it reduces your ability to write off some types of expenses and deductibles, however, it means that you can undertake other activity as a business.
For example, if you own your own business and want to invest in property as part of your business activity then this can be the right decision.
With an SPV you’re setting up a specific company solely for the purpose of investing in and developing property, so the tax benefits are greater for investors and developers.
Many use an SPV as they plan to sell their property more easily in the future. Alternatively, it can help when arranging finance on a property to keep the asset and liability separate. For tax purposes, it can help in reducing your tax bill.
In terms of the tax benefits, the Finance Act 2015 introduced limits how much mortgage interest you could claim as a tax allowance. Over the years it’s gradually been reduced and is now nothing.
From the most recent (2020-21) tax year and moving forward rental profits will be taxed at a maximum of the basic tax rate which is 20%. This has meant that, for many property investors, especially sole traders and those who use mortgage finance, it has made some investments including buy to lets sometimes loss-making.
Having said that, limited companies or SPV’s are still able to claim tax relief on the mortgage interest they pay.
If you want to talk about this in some more detail with us, we can give you more specific advice according to your circumstances.
How to get into property development with no money
Turning real estate development into a career without a deposit, or a significant amount of money behind you, can be difficult but not impossible.
As we’ve already mentioned, a lot of the talent behind property development is spotting potential and having an eye for location, popularity and being able to make the most of a limited budget.
Ultimately, you could look to get 100% finance on a property as long as you have a solid plan and exit strategy for your development. Of course, 100% loans are harder to source and agree, and these types of loans tend to have much stricter criteria so if this is something, you’re looking at you’ll need to speak to one of our team beforehand.
When it comes to the actual renovations or building works, many of our clients use loans for the physical sale of the property and then undertake the actual works themselves. Many new property developers are actually builders or tradesmen that are able to do much of the work themselves.
In this situation you could, for example, look to source 100% loans for the short-term purchase of the property before carrying out the works yourself and then selling it on at a profit and repaying the loan in full.
What does property development involve?
Depending on the type of property development you’re undertaking it’s not actually hugely complicated.
Your first task is to find an opportunity that you’d like to invest in. That may be a house that has fallen into disrepair that you’re able to pick up for a really good price. Things to consider when looking at these opportunities is location, price, and similar properties in the area.
If you’re looking to keep the property as a buy-to-let, how much do houses rent for in the area for a similar size? What are property prices like round the area? is it close to transport links and schools? generally you’ll want to ask yourself the same questions you would if you were buying for yourself.
Secondly, you’ll need to assess what work needs to be undertaken and then price that up. If the investment just needs to be cleared out, painted and re-plastered then that’s obviously a smaller undertaking that having to re-wire the entire house. You need to consider if you have the expertise to do the works yourself and pass safety checks, and if you don’t you need to find somebody who can.
Once you’ve completed your property development it’s then time to consider whether you’re looking to sell it or keep it on as a landlord. Both have their advantages, but if you’re looking to sell, you’ll need to get an estate agent and solicitors involved and this can have costs involved. If you’re looking to rent out the property, then you’ll need to find an agent that can help you find tenants.
Why become a property developer?
If you’re somebody with the skills to pull off a property development yourself then it’s extremely lucrative. The housing market in the UK has been booming for years now and there isn’t a five year period in recent British history where house prices have dropped.
The process itself can be complex but considering the time and effort required, there isn’t many other professions around that can bring in quite as much of a financial reward when it’s done well.
If you’re also somebody who enjoys working with their hands, or on a project, then property development is an excellent career choice.
Advantages of becoming a property developer
As with any type of career or investment, there are advantages and disadvantages, so we’ve included some here.
As a career or business, it’s lucrative and can earn you some serious money. If you’re able to develop a good number of properties across the year, then you can make a great profit. Similarly, if you decide to become a landlord then not only do you have valuable assets in your portfolio, but you can make excellent rental income.
No qualifications required
Absolutely anybody can get into developing properties. There are no entry requirements and as long as you’ve got the gumption and work ethic then you can quickly learn how to make good money from property. If you’re not able to do some of the work, then you simply need to know how to source great contractors and negotiate.
You can do a lot yourself
Aside from arranging development finance to fund the purchase of the investment, you can actually do an awful lot of the work yourself in this industry. Painting, fitting carpets, and other DIY works are quite often done and completed by the investment owners themselves. In London, for example, there are countless examples of this.
Disadvantage of becoming a property developer
Of course, this industry isn’t for everybody and there are some down sides that you should be aware of.
It can be risky
If you’re arranging development finance, then don’t forget you’re working to deadlines and budgets. These can be tight, and you need to be switched on to stick to them. If you’re inexperienced or things start to go wrong, then you run the risk of losing your investment.
It can be stressful
As with many careers, developing properties can be highly stressful and especially when you’re working to deadlines and budgets. Work can quickly become a much bigger job than you originally anticipated, and you need to be dedicated to make good money in this industry.
Expect the unexpected
When it comes to developing or investing in properties you need to be aware that some projects can quickly balloon into a much bigger job than you’d expected. Surveys can only give you so much information and things like roof repairs or structural damage can quickly become a costly burden on your time.
How much do property developers make in the UK
This can vary greatly depending on the type of project, the developer, and the size of the project in question. A good rule of thumb for most developers is to look to get a 25% return on the cost of the project once sold.
Let’s say you pick up a house for £50,000 and it costs you £10,000 to complete the development of the project. At the point of sale, you’d look to be making around £15,000. Take away miscellaneous costs and other overheads, and £10,000 would be a good profit.
You can then scale that up depending how many properties you’re able to complete in a year. If you can do 10 over the course of a year you can easily turn over 6 figures.
How to finance property developments
When it comes to developing property there are many alternatives in which you can finance your project. Here are some of your options:
- Bridging loan – We can help you arrange a short term bridging loan that would allow you to purchase the property and cover the cost of the of the works, paying back the loan once completed.
- Mortgage – If you’re looking to keep hold of the project upon completion, we can help you arrange a Buy-To-Let mortgage once you’ve completed your works.
- Auction finance – One lucrative way to invest in the industry is to buy at auction. We can help you to finance an auction purchase with specific and specialist lending.
- Development finance – If you’re looking to build on land then we can help you with specialised finance to buy the land, develop it and then arrange longer term finance once you’ve finished.
- Mezzanine finance – For more experienced clients, mezzanine finance covers other types of development finance when you need a higher deposit or specialist investment.
- HMO loans – If you’re looking to develop an existing investment into multiple properties, apartments, or maisonettes then we can help you arrange specialist loans to do this.
Should I set up a limited company for property development
As we mentioned earlier, the tax benefits of setting up a specific company in order to invest in, and manage, your properties are clear and realistically it’s much more effective to do this.
Having said that, it’s worth speaking to an accountant if you’re looking to do this as you’ll need to ensure that you file all the right paperwork with the HMRC and make sure you’re registered properly to ensure you don’t cause yourself unnecessary problems.
Getting into property development – Summary
Ultimately, developing properties can be, and often is, a very lucrative and rewarding endeavour. It takes dedication, instinct, and talent to be able to be good at it, however, it’s something anybody can get into and learn how to do.
You need to be prepared to put in the hard work and take on risks, but it’s probably one of the best ways to make good money in the UK right now, whether you decide to sell your investments on or keep them as a buy to let long term return.
Arranging finance or loans for development is relatively straightforward and if it’s something that you’re looking to get more involved in then our advisors and team are available at any time you need to provide free, no obligation advice. We can help with most of your queries and as one of the most experienced brokers in the industry we’re available to help with a