Everyone likes to think that they could turn their hand to property development – and turn a handy profit while doing so (sorry). It’s certainly more than possible, but you have to become something of a control freak to really make it work. There are dozens of things to think about and dozens of things to avoid. There are also five definite factors that you have to pay attention to right from the start.
As in, can you actually get one. It’s great that you’ve found your ideal doer-upper, but as it doesn’t actually have a functioning roof, your lender might not want to approve your application. If it’s a real wreck, you might have to look elsewhere for funding.
You might have your own money upfront anyway, or you may be able to go into partnership with another investor. There’s always the possibility of a bridging loan, although these can be expensive.
Your best bet is to start off by talking to a mortgage broker to see what your options are and what state your property has to be in to be eligible for such financing. This will give you a good idea as to how it’s all going to be paid for.
Quite simply, this comes down to looking at how much you’re buying the place for, how much you’ll be spending on it to bring it to market and then how much you’ll (probably) sell it for. Those numbers have to make sense.
Then again, even with those numbers, that’s not everything… You may come to market at a low-point, there may be hidden expenses (actually, there will be hidden expenses because there always is) or you may be on the market for longer than anticipated. All of these scenarios will eat into your profits, so when you’re doing your budget, you need to look at the worst-case scenario and still be reasonably happy with your profit.
Your escape route
You need a Plan A and a Plan B. You also need a Plan C, which is often an exit strategy to let you get out of the entire process or another tactic to help you to make a profit.
A good example of this is an investor who has secured a property and the renovations are going great, but there’s a huge downturn in the sales market for that type of property in that area. The investor is paying a mortgage each month and so needs to make it work. The two options are to sell it for a smaller profit to another developer or to rent the place out so that the mortgage is paid. When the market picks up, he or she can think again about selling.
Your contingency budget
You always need a contingency budget because there’s always something extra that you need to spend extra money on. You might find that one set of wiring needs to be brought up to the relevant safety standards, so you have to strip it all out and then re-plaster. This in turn reveals a touch of damp or woodworm…
This is precisely why you need to tack on an additional 15% to your budget when you start. Think of it as a slush fund if you like, but make sure it’s there. In the unlikely event that you don’t use any of it, then you’re quids in!
Your holding costs
Owning a property isn’t free. You’ll be paying a mortgage or a loan off and even if you aren’t, there’s council tax, ground rent and so on. These costs can often be overlooked by inexperienced property investors, so get ahead of the game and factor them in right from the start. If you’re planning to be done and sold up within 18 months, budget for two years of holding costs just to be on the safe side.« Back to Latest News