Property Development – A Good Alternative to Buy-to-Let?

Usually, when people choose to invest in property, they generally think about buying a property to rent out or buying a run down property, refurbishing it then selling it on at a profit. These are generally the two paths that most people follow when looking to make returns from property investment. However, there is a third option that most people overlook and it is probably the most profitable area of the property market – property development and building of properties.

Building your own properties and becoming a property developer is a sensible proposition in my mind for three reasons –

• There is a huge demand for property and a proven market place

• Improvements in financing means that this area of the property market is now very accessible to most people

• You can fix your costs when building a property, calculate the properties value easily and from this easily calculate your profit margins

With the above three points in mind, I personally feel that becoming a property developer may propose a serious proposition to either seasoned property investors or people who wish to invest in property but want to spread their financial investments into other areas of  the property market.

Property development is a lucrative alternative to property investment because the profits realised on even one property can be significant and can be gained in a shorter period of time. For instance, the project life cycle of a 5 bed family home may only be 12 months and if we calculate a 20% net profit on the value of the property, which is worth £500,000, then your profit for the project will be £100,000.

If we then compare this to two properties bought for investment, both of which have a value of £250,000, and if we assume that the value of each of the properties will rise by 5% in 12 months plus both properties realise a rental yield of 5% per annum, then the total capital gains and rental income of the properties combined in 12 months will be £50,000, discounting interest on the mortgages and associated maintenance costs. As you can see, the returns on a new build are significantly greater generally than a normal property bought for standard buy to let purposes.

However, it is not just about the money, there is also a personal satisfaction to designing and building a property. I personally feel that to see a property that you have helped design slowly take shape as it is being built is hugely satisfying. It is also highly personal and creative as there are so many niches that you can concentrate on.

But how difficult is it to actually build a property? Well the actual process in designing and building a property is incredibly complex and requires tremendous skill but you do not need to worry too much about these processes. As a property developer, you will put together your own team of experts which will include an architect, a specialist financial broker that will help you raise your development loan, a building contractor, perhaps a project manager and you will more than likely work with an estate agent who will sell your properties.

This is why property development can be such an appealing consideration, you can put together your own team of professionals that will do all of the technical aspects of design and construction for you. And with development loans being widely available to everyone these days, property development can be an excellent business proposition as well as a very wise investment for your cash.

So what will your greatest challenges be to becoming a property developer? I think the biggest challenge you will face is raising the finance needed to fund a building project and finding a suitable building plot. Although development loans are widely available to most people, if you have little or no experience in property development or property in general then it can be tricky to raise a development loan. Lenders will look for your experience and knowledge and if you do not have this, they may look for assets you may have so that they can secure any loans against them such as your main property.

However, if you are inexperienced it will help you greatly to build a highly experienced team of professionals around you to work on your project. One of the key members of your team will be an experienced broker and preferably one that specialises in the property development arena. They will look at your experience or any assets that you may have and they will help you choose a suitable development loan and help you secure it.

There are also specialised financial packages available in which you can obtain nearly 100% of your land purchase and build costs for a development project. These are called equity and mezzanine funding. With equity funding, an investor will lend the majority of your total project costs in return for a stake in the profits of your project.

An equity partner will probably want 50% of the project profits but the advantage of this is you will not pay any interest on the money lent to you. Mezzanine funding is slightly different and it is sometimes called ‘top up’ funding as it can be used to raise up to 100% of overall development costs if used with other development loans or jointly with equity funding. Mezzanine funding is very expensive and the lender will charge you a redemption fee at a pre-agreed rate when you pay back the loan.

However, this form of financing can be very useful as mentioned, to ‘top up your funding to 100% of total costs if you have little or no money to invest into a project. This type of funding is generally more suited to people who have experience of property development and more suitable for larger development projects.

Finding a suitable building plot can also be very difficult and time consuming. There is a large demand for development land and hence many building plots that come onto the market are bought quickly as competition is fierce. However, there are many ways you can go about securing your plot, from using the internet to locate plots, auction houses and special agents and you can even locate and secure your own plots. It is worth taking your time when looking for a plot as you want to buy the best plot you can in the best possible location.

So what are my top tips of how to become a successful property developer? If you have little or no experience, then I would try and find a business partner who has experience of property development who you could share costs with. Failing this, make sure that you put together a highly experienced and credible team of people and have a plot in mind before you go and apply for a development loan. This will show any lender that you are serious and you can apply for a loan immediately. It may also be in your favour to put together a suitable business plan so that you can show any lenders what you are looking to achieve.

Make sure that you work with a credible NHBC accredited building contractor who can also project manage the project for you and make sure you become an NHBC accredited property developer yourself as this is highly important. My last tip is to take your time in finding the right building plot. Your land will be your most valuable asset so only buy a plot in a good location and make sure that you do not pay over the odds for the plot, as this will eat into your profits.

As you can see, property development can be a very lucrative alternative to property investment. If you are already a property investor looking for a new direction or are new to property and fancy doing something slightly different, then property development and building your own properties maybe a more lucrative alternative to property investment.