How to get started in property development and secure funding
Property Development takes planning, time and most importantly money.
There are many routes you can take to become a property developer, either alone, in a partnership or using a property investment company.
Regardless of which route you take, you will always need adequate funding to get the ball rolling. Funding can come from a variety of sources such as
- Personal Funds
- Family members
- Development Loans and Finance [find out more]
As with all businesses, you need to have a clear plan of what you wish to achieve, both how and when.
Understanding what you wish to achieve with your new property development program enables you to keep focused on your goals and to track your progress.
Creating a business plan is the easiest way to make sure you have clearly documented the aims and objectives of your new venture.
Most business plans contain
- Overview of your business
- Aims and Objectives
- Executive Summary
- Market information
- Opportunities and Risks
- Your strategy
- Team Members
- Marketing Plan
- Operational Plan
- Financial forecasts
- Profit and Loss forecast
- Balance Sheet Forecast
Many new developers can benefit from completing SWOT (strengths, weaknesses, opportunities and threats) analysis to gain a clearer picture of their own and the businesses capabilities. [Find out more on SWOT analysis]
Deciding what type of property to develop and invest in
There are many options available when it comes to developing property and when first starting out, some developers focus on a particular property type while they find their feet or one that suits their budget.
Are you aiming for quick(ish) returns on your investment?
One of the quickest ways to get a return on your initial outlay would be to renovate and sell commercial or residential property. Selling on property (hopefully at a profit) returns your initial outlay plus profit, allowing you to invest in new developments. If you have made a good amount of profit, you will be able to invest in multiple, larger or more complex projects, which have the potential to give better returns.
In addition, the property sales market in the UK is showing improvement after several years of stale growth and decline, even with property prices falling in many parts of the UK [find out more]. In January 2019 there where over 67,000 mortgages approved in the UK [find out more].
Want to build a property empire as opposed to quick returns?
If you are happy to keep a hold on returns from your investments, then you may be more suited to renting/letting your newly renovated properties, this is known as “buy to let”. Building up a property portfolio can be an effective tool in increasing your net worth. However, this type of strategy does not give large bulk returns as with selling on the property. If your aim is to achieve a steady stream of income, rental profits are for you.
Having a property portfolio would also allow you to obtain finance secured on the properties such as commercial mortgages [find out more] or development and bridging loans. We will talk about that later [jump to section].
How can do I decide what property to invest in?
Build up a property empire → Good rental figures within the location in relation to initial outlay
Quick returns on investment → Property values within the area in relation to initial outlay
Spending too much on the purchase and renovation of properties in relation to the maximum rental value OR property value can result in a negative yield OR profits and this means you lose money.
Research is of paramount importance. Do your homework –
- How much to purchase?
- How much to renovate?
- What planning permission is required?
- What are your potential returns?
- Any legal restrictions? – property use, leasehold, freehold
You may want to renovate existing buildings, however there is a lot of money to be made in new developments. “Ground up” projects consist of purchasing land and then building properties on it.
This many sound simple but as mentioned above you need to consider planning permissions and legal restrictions on the use of the land.
In addition, you need to think about who will build the properties and the resulting costs, do you have adequate funding to complete the work? Many developers opt for bridging finance [find out more] to bridge the gap between development (debt) and sale (credit) to ensure projects with a quick turnaround are completed or for longer term projects development finance [find out more] is viable option.
How can I fund property developments?
There are several funding routes available for a property developer and which one is best for you depends on your aims and objectives.
If you have adequate cash reserves to complete a project, all the profits go back in to your pocket. When personally funding developments you must consider if you have enough cash to complete a project to the required standards, on time and more importantly without negatively impacting on your personal finances.
Friends/ Family members
Borrowing from friends and family may seem like an easy option. You need think about the impact on relationships, their own personal finances and repayment plans.
If you are uncomfortable with borrowing from friends and family, seeking 3rd party investment can be a useful route for funding. You do have consider what investors would like in return. Do they want a cut of the profits/rental amounts or stake in ownership and so on. Again, you need to consider what you want to achieve from your projects and determine whether giving investors a cut of your empire suits your requirements.
Development Loans and Finance
If none of the above suit you, then using finance options such as development loans and bridging finance are good options.
Bridging loans are taken is for quick completion of a property purchase, to raise capital for cashflow or to help repay adverse debt. Bridging loans tend to be between 3months and 2year loans, so if you are looking for short term finance this type of loan is a good option. [find out more]
Development loans are a good option if you are seeking longer loan terms as these usually run 6 months to 5 years. This would give you more time to pay off the finance amount. You will need to think about property type and LTV (max loan to value) as lenders takes these into consideration. [find out more]
You have finished developing the property, what now?
You have two options here, rent or sell. When deciding you need to refer to your aim and objectives – quick returns or a property empire.
Things to consider are;
- Resale value – would you make a profit?
- Rental yield - what return are you likely to achieve?
|Value After Renovation
To work out you the rental yield
(Annual Rental Income ÷ Purchase Price + Costs) × 100
(£6,500 ÷ £100,000) × 100 = 6.5% yield
To work out pre-tax and fee profit
(Resale Value − Total Costs)
£130,000 − £100,000 = £30,000
In the above example there is a yield of 6.5% which isn’t bad, however many property developers aim for a yield of over 8%.
With lower yields you must consider if you will have enough cashflow to cover operating costs and any finance repayments such as development loans or mortgages. However, it’s worth noting that favourable yields differ from location to location and developer to developer.
It is for you decide what level of income you wish to achieve. After all, the aim of the game is to make profit on your investments.
Looking at the resale value of the above would gain £30,000 pre-tax and fees profit. If you are aiming for quick returns, then £30,000 is a nice profit to come away with.
Whichever route you take regarding project type, buy to let/resale and funding routes, proper research and planning ensures that your developments and more importantly your company is a success. There are many factors to consider when starting in property development and it is important to ensure you keep on top of your finance, workload and investment choices to ensure you are one step ahead of the competition.
Updated: May 13, 2019
For more information on funding options, do not hesitate in contacting us for more information.