So wouldn’t it make sense to aim big and get more profit for the same effort? The answer is, in short, no. Larger-scale projects are generally more complex and carry greater risk. Far better, in my opinion, to do two smaller, more straightforward deals than a single whopper. The greater certainty of making a profit and lesser complexity and stress outweigh the burden of the additional workload that comes with doing two projects rather than one.
There’s an almost endless list of risks in property development. While you can’t neutralise them all, if you’ve got your risk goggles on, you’ll be able to make sensible decisions that significantly reduce the chances of coming a cropper. The developer’s number one target should be never to make a loss, and while you won’t be able to anticipate every sling and arrow that will come your way, by de-risking your approach, you’ll have every chance of making a profit whatever happens.
- Sweating the asset
Imagine that you’ve found an excellent conversion project, an old retail building just off the high street that would carve up quite nicely into five new apartments. Ok, it’s a bit of a quirky shape, and it looks a little, well, ‘shop-like’. But it’s got bags of character, nice high ceilings, plus it’s in an area that estate agents assure you is ‘up-and-coming’ without looking embarrassed or avoiding eye contact. You’ll also be able to retain some of the building’s period features and you might even keep a unit for yourself once they’re built; they’re going to be THAT good.
Now, as a developer, you’re likely to be targeting a profit of 20% based on your project’s GDV (gross development value). This is the combined sales value of all your units. And to make the maths a lot easier for both of us, let’s assume that you’re selling five flats for £200k each, which means your GDV is £1m, and your target profit at 20% will be £200k. In other words, your entire profit lies in that fifth and final flat.
Ok, now imagine that I showed you how you could get a sixth flat into the same site without breaking into a sweat. How on earth would I be able to do that? The same way anyone who’s been doing a job for 40 years knows how to do stuff. After a while, it becomes second nature, even when it can look a bit like alchemy to the inexperienced developer’s eye. And this sixth flat is where the numbers start to get interesting. Flat 6 doesn’t add a sixth to your profit; it almost doubles it. The maths won’t work out to be precisely two-fold since flat 6 may incur some additional construction costs, but hopefully, you get the general principle. Your first four flats pay for the development, and apartments 5 and upwards are where your profit lies. So getting good at learning how to maximise the value of an opportunity is going to set you apart from the competition, big-time. Not only are you likely to make more profit, but you’re also going to be able to pay more to acquire properties, which will make a major difference to your chances of success. Understand how to do things like block planning and go out of your way to learn those all-important tips and tricks that seasoned developers have learned the hard way. And the good news is you don’t need forty years of experience to do that; you simply need to learn from someone who has.
Asset sweating doesn’t stop at the number of units you can fit in; it also includes how you design them. Understanding who your target market is and what they want should be a key objective, but there are also ways to maximise both the floorplan size of your units and that all-important storage space. These add value and saleability to a project and set you apart from the competition. Which segues quite nicely into my next point, which is: