Property development firms are created frequently and that is because their owners think that there is money to be made in the industry. In many cases they are right and giving up their day jobs or taking on a huge side project is worth the gamble when it pays off. However, for other people, their dream becomes a nightmare and all they are left with at the end of the project is a hefty bill for a house they can’t sell. As with any industry, there are two sides to the money-making coin but how do you know if a property development business is going to be profitable before you start, and is it worth taking the risk and finding out for yourself?
Industry Knowledge
As with any new business, it helps if you have a good working knowledge of how the industry works before you get started. This can save you a lot of time and money as you will already be able to do a lot of the building or renovation work yourself. Even if there are things you can’t do, the chances are you will know someone else who can. You can also anticipate many of the pitfalls or issues that are likely to arise which will help you avoid them.
It is a little harder to make a profit if you don’t have an industry background, but not impossible. If you have to pay lots of people to do the building work for you then this will eat into your profit. You will also be less likely to anticipate issues. This means that you might make a smaller profit to start with but if you can learn as you go along there may be jobs you don’t have to pay other people to do in the future.
Business Plan
A business plan is the backbone of any business. You will need to work out how much it will cost you to do everything from buying bricks to funding your biodiversity net gain plan; there’s more information here on that subject and Arbtech are able to provide a great quality survey on the land you buy so that you will have a good idea of what you need to do to satisfy UK legislation.
Including every financial detail means that you can work out your costs to the finest detail. You should also allow an extra 10-20% as a financial buffer just in case your biodiversity net gain costs you more than you thought, or the finished property takes longer to sell than you anticipated. Putting a business plan together will help you to assess if the business is going to be profitable and if it is worth your while financially.
Research
Research is key to the profitability of property development. Doing your research well means that you will be able to spot the best opportunities in terms of location, the type of property that people in the area want to buy, and the amenities that are available in the surroundings. Good research will mean that you can find the best opportunities, attract a lot of interest from buyers when you have finished the property, and achieve the best sale price. This increases your profit margin as you won’t have to cut the sale price you wanted to achieve, and the finished property won’t be sitting unsold and costing you money for long.
Buying Price
To make a good profit in the property development industry you need to buy a property or piece of land at a bargain price and then do enough work that your finished house can command a high selling price. To pick up a bargain it is a great idea to go to the property auctions. These are situated all over the country and they can be a brilliant place to pick up a low-cost development project. You should be aware that once the hammer falls you need to be in a position to exchange contracts on the property, so make sure you have done your research on the plot you want to bid on and have your funding in place before you raise your hand. Remember that the more you have to bid to buy the property, the more your profit reduces.
Funding
How you fund the properties or land you buy for development will have an enormous impact on your profit. The more you have to pay to finance your purchase, the less profit you will make. If you have savings, then it can be a good idea to use these to fund your purchase as you won’t have to pay interest. However, this method can be risky if the development works out to be more expensive than you thought or you need your money back by a certain time and the sale takes longer to go ahead than planned.
Banks and finance companies may be willing to lend you enough money to finance your business but check the small print because they may be able to repossess the property if you don’t keep up the monthly payments while you are developing. You should also consider that if the project takes longer to complete than planned or you can’t find a buyer as quickly as you would like to, this might cost you another few months of loan payments which can quickly eat into your profit.
Quality
The quality of your development can make a difference to your profit regardless of how much you spend. Cheaper materials will save you money on the development of the property, but it may mean that you will struggle more to find a buyer, or the buying price you want once you have completed the development. The better the quality of the building the more you will have to spend initially. However, you are more likely to recoup this outlay when you sell. Quality is a bit of a gamble, and you will have to decide on the quality you want to achieve before you start building. Property development can be a profitable business if you take the time to do your planning and research before you start. It can work well either as a core business or a side-line depending on your aspirations.
