Five Key Ingredients For Property Development Success
I should probably sneak in a disclaimer right at the start by saying that these aren’t the ONLY five things you need to be a successful property developer. But I CAN tell you that if you haven’t ticked these five boxes, achieving property development greatness will likely prove to be an uphill struggle.
Finding a great property development deal can be rather tricky, as any new developer will testify. It would be nice to think that we could have a quick surf on Rightmove one evening in our jim-jams, pick up a couple of great deals that deliver £250k profit apiece, and get our construction team to crack on with them. But let’s face it; if it were that easy, everyone would be a property developer. However, this difficulty is good news for the more clued-up and tenacious individual.
Other people start by thinking they’ll ‘give development a go’, and when they find it’s not quite as easy as popping to Sainsbury’s, they give up. And for the discerning, educated would-be developer like yourself (should I also mention suave and sophisticated?), it means there’s much less competition.
For my sins, I’ve been involved in property development for nearly forty years, and so can almost remember when Big Ben looked the colour it does now the first time around. But with age comes experience, and I’ve seen and worked with many developers and their projects during that time. And a question I often get asked is what sets the most successful new developers apart from the rest. I’m talking here about first-time or relatively inexperienced developers who are just starting their development journey. And while there are many ingredients required to bake the ‘perfect developer’ cake, there are five key areas that can make a big difference to a new developer’s chances of success. Let me take you through them, starting with:
- De-risking your projects
Mitigating risk is a critical task for any developer, and it should be front of mind in almost every decision you make. It’s those ‘what-if’ scenarios that can often bite you on the backside, and you need to neutralise as many of them as possible.
So, what sort of risks are you likely to encounter? Let’s begin with one of the most significant development risks: planning. If you’re building something new, you’ll need to get planning permission, and unfortunately, our planning system delivers little in the way of guarantees. Chronically under-resourced local planning departments often have little hope of hitting their agreed turnaround times for considering applications, and many are therefore kicked into the long grass. You could be asked to undertake all manner of surveys, which conveniently stops the clock, suspending the deadline requirement. And even when your application is considered, there are many areas where the council can push back or object. How can you remove planning risk? While you can’t dodge the system altogether, you CAN get a massive head start by avoiding new-build and converting existing buildings instead, using permitted development rights (PDRs). These rights automatically allow you to change the use of the building, usually to residential, without the need to apply for full planning permission. So choosing conversion over new-build can dramatically reduce your planning risk, give you more certainty, and usually save you time.
Unexpected costs are another critical risk. You need to factor in a contingency fund for unbudgeted items during the construction phase, usually around 10-15% of the construction cost. Too many developers optimistically leave out this element to get their numbers to work, yet I’ve never seen a project where there wasn’t some form of unexpected cost. The fact that you don’t know where your unexpected bills will come from shouldn’t stop you from assuming they will come from somewhere.
Risk and reward go hand in hand; generally speaking, the bigger the risk, the bigger the potential reward. But the greater the risk, the lower the chances of success. That two-hundred-to-one Grand National long shot looks well worth a tenner each way, as it could net you a couple of grand in profit. But we’re all too familiar with the depressing reality of seeing your unfancied four-legged hopeful trip over the first fence, depositing its passenger on the Aintree turf only marginally before your crumpled betting slip. Far more sensible to have gone with the 12-1 shot that had a much better chance of staying the course. The rewards are smaller, but the likelihood of achieving them is much greater. The same is true when it comes to the scale of your development. The big attraction of larger development projects is that twice the size does not equal twice the work, but it could easily generate twice the profit.
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:
- Avoiding the competition
They say that beauty is in the eye of the beholder, which is undoubtedly true in the development world. When developers look at a project, most have the same thought in mind. That rather nice office building on the edge of town is SO ripe for redevelopment into flats. All the windows are in the right place, and it even has parking. Just strip out the internal gubbins, put up a few partition walls, bang in some kitchens and bathrooms, and Bob’s your uncle – what’s not to like? The problem is that this is exactly what has crossed every other developer’s mind, too, so competition is likely to be fierce.
Now let’s contrast this prime office conversion opportunity with the scuzzy, tired-looking light industrial unit that’s been hanging around Estates Gazette like a bad smell for months. No self-respecting developer worth their salt will touch it with a bargepole. After all, who would want to live in a building that hideous? Surely, you’d have to knock the thing down and build something from scratch, wouldn’t you? The answer is, of course, that you wouldn’t. With a bit of imagination and a half-decent architect and planning consultant, you can readily turn the humblest of buildings into something distinctly des res using those rather useful permitted development rights I mentioned earlier. And while your sow’s ear might not completely bely its humble origins, you’ll still have created some highly sellable flats. And you’ll have competed with far fewer people in the process.
Taking the less obvious route isn’t the only way to dodge the competition. Pursuing a direct-to-vendor approach can also pay dividends simply because you’re not competing with anyone else. It’s just you and the building’s owner. The downside is, of course, that finding people whose properties are not on the market but who want to sell is nothing like as easy as flicking through Rightmove. We call it the hard yards of development. Thomas Edison said opportunity is missed because it’s dressed in overalls and looks like work, and he could just as well be talking about finding off-market deals. It takes tenacity and effort, and there will undoubtedly be some dead ends along the way. But the results can be spectacular, particularly as you’re only looking for one deal, not dozens. And guess what? Because it’s not easy, you’ll have far less competition.
- Going the extra mile
Confession time: David Beckham is probably a better free-kick taker than I am. I say ‘probably’ as I’ve never actually taken a free kick, so there’s a chance, albeit a slim one, that I might have a natural talent that has thus far gone unnoticed. But on balance, I suspect Mr. B probably has the edge. And the reason he’s pretty tasty from just outside the box is not down to some innate talent he was born with. Instead, it has come about through doing thousands of hours of practice. He became great (not just good) at free kicks because he took the time to go the extra mile to learn his craft and then practice, practice, practice. Then he practiced some more. He was first to arrive at training sessions and the last to leave. When the rest of the team were back in the changing room, he’d still be out under the floodlights, bending it like, well, his good self.
Why is this remotely relevant? Well, it’s all about going the extra mile. There are many footballers who can take a free kick, just as there are many developers who are looking for a development deal. But the great developers are the ones who take things to the next level. They don’t just talk to commercial agents; they build relationships with them. They’re not just searching on Rightmove; they’re out there trying to find off-market deals too. And they make every day a learning day, pushing their business forward.
So make a point of not just getting stuff done; do it at 110% instead. Challenge yourself to do it better. You’ll soon find yourself differentiated from the rest of the pack.
- Standing on the shoulders of giants
I’m duty bound to declare an interest on this one. As someone who runs a property development training business, you won’t expect me to tell you training is a bad idea. But if I’m honest, I suspect I may be preaching to the converted. After all, it always bemuses me that someone would embark on an enterprise like property development without going into it armed with as much information, knowledge, and nous as possible; the numbers are too large to make winging it a wise move.
Education provides obvious benefits, such as avoiding some of the more common pitfalls that can often catch out the unwary first-timer.
I’ve trained enough people who arrive with us having come unstuck on a project to know it’s a common issue. But it’s not just the ability to dodge bullets that makes training a must-have; it’s also the ability to spot opportunities.
As I mentioned earlier, experience in any discipline allows you to see things that lesser-trained eyes can’t see. The good news is that for most things in development, you don’t need the experience itself – you simply need the knowledge. So getting trained by someone with the experience to teach you how to unlock the potential in any given development project will provide you with a massive edge. And because most people lack the experience, they miss the opportunity. But get yourself educated, and it can make all the difference.
So there you have it, five essential elements that will hopefully make a big difference to your chances of success. Property development isn’t easy, but it’s eminently achievable for most people who are armed with the right approach, tenacity, and knowledge. Ensure these five elements are part of your game plan, and you should have every chance of success.