The YPN Guide To Small-Scale Property Development – Part 1 of 6

Everyone knows that property development can be highly profitable, yet many have never tried to tackle a development project. This is odd given that most people reckon they could successfully take on a flip, refurb, or HMO conversion, yet these projects will require you to do more work, invest more of your own cash, and make you a lot less profit. And with the buy-to-let market in a tricky place right now, it’s no wonder that so many people, both new and experienced, are making small-scale development their main property strategy. So what exactly is small-scale development, and what are the benefits?

Let’s start by clarifying what we mean by ‘property development’. It’s a broad church, with house flips, refurbs, and HMO conversions at one end of the spectrum and building new housing estates on the other.

So, if you’ve done any of these projects before, you’re already a property developer (congratulations!). The point is that property development can sound big and complicated, but the reality is that it doesn’t have to be, and many people develop property without thinking of themselves as ‘developers’.

Development’s sweet spot is arguably ‘small-scale’ development, which sits one rung up the ladder from a house flip or refurb. Typically, you’ll be converting an existing commercial building into flats, creating between 5 and 20 units, and targeting a profit of between £100k and £500k. So, larger in scale than a flip but still small in development terms. Small-scale could also include new-build; however, you’ll ideally want to convert an existing building as opposed to building a new one because of something called Permitted Development Rights (PDRs). Unlike new builds, these allow commercial buildings to be converted to residential use without full planning permission. This shortens project timescales and reduces the risk of not getting planning, plus you don’t have to go into the ground where nasties can lurk. There are also numerous benefits of working with an existing building, utilising the existing foundations, walls, and roof, with services already attached to it. So, for a first project, I’d recommend a PDR scheme all day long. And once you’ve built it, you have the option to sell it or to rent it out.

For many, the key attraction of small-scale development is the financials. A £200k buy-to-let will typically require a £50k deposit and a probable 10-20 year wait to double your money. Compare that to a small development project where a £12k investment can be turned into £200k profit in under two years, and you don’t have to look very hard to see the attraction. I’ll explain how the finance works later in this series, but the key difference is that in development, you can get far more leverage from other people’s money, plus you’re forcing up the value in 18-24 months rather than simply waiting for house prices to rise.

And the leverage you get is not all financial. You’ll be employing a team of professionals (architect, contractor, structural engineer, etc.) to do the work.

However, unlike a flip or refurb, where you’ll invariably oversee the project yourself, a commercial conversion has a bigger budget, allowing you to employ a professional project manager. They’ll oversee the project on your behalf and ensure everyone pulls their weight, so you won’t have to. You play an executive role rather than a hands-on one, and your main jobs are to find potential projects, evaluate them, arrange finance, and build a team to do the work, which, let’s face it, isn’t too different from flipping or doing up a rental unit. It’s just a lot more profitable.

So, that’s a brief overview of what’s involved. But why do many think that 2023 will be a perfect time to get into this type of development? Firstly, there’s a lot of commercial properties out there that are ripe for redevelopment. No town or city is immune from an oversupply, from shops to offices to light industrial. On the other hand, we desperately require new homes, so you’ll be catering to a very needy market. But commercial property prices will likely dip in 2023 as more businesses fail and more owners struggle with spiralling overhead costs, making it a great time to buy.

Materials and labour costs, so unpredictable during the pandemic, have already started to fall as the major housebuilders put the brakes on existing projects. With house prices falling this year and not expected to start recovering until mid-2024, they will keep the brakes on, leaving you to benefit from reduced costs in the market. And, of course, by the time you’ve completed your project, we should be in a rising market again. As perfect timing goes, this is a once-in-a-generation opportunity, and having had some forty years in the industry, I can vouch for the fact that the stars align like this very infrequently.

So, that’s an introduction to small-scale development and I’m sure you can see its attractions. But it’s not an easy ride, and, not surprisingly, there’s some stiff competition out there.

Luckily, this doesn’t stop first-time developers from being very successful as I’ll explain later in the series. And, for balance, I’ll also be covering the risks and pitfalls you might encounter along the way.

Next month, I’ll be looking at how you can get credibility as a developer, even if you’ve no previous property experience. I’ll see you then.