How To Pick The Right Property Development Project

When it comes to property development, it’s fair to say that there’s a broad range of dishes on the menu. And choosing the right one can often present something of a challenge, particularly for the new or inexperienced developer. So, how do you go about choosing the right development project for you? First, let’s take a look at the raw ingredients to see if we can’t find a recipe to tempt you.

I’ll start with an obvious first question; how hungry are you? For the ravenous, big can be beautiful, and many a head has been turned by the chunky profits that can be made from larger schemes.

Of course, economies of scale also play a part; from the developer’s perspective, building a hundred units is not ten times the work of building ten, but it can produce ten times the profits, if not more.

But with greater scale comes greater complexity and risk. If your project gets unexpectedly held up, then you’ll much prefer to be paying interest on a few hundred thousand than on tens of millions.

Small may be easier and less risky, but will it make you enough profit? Here’s where you need to do your own maths. You’ll be targeting a minimum of 20% of the GDV (gross development value, the amount your units will sell for) as your profit, and it will take you on average 18-24 months to complete a small-scale development end-to-end. So, as an example, if you’d like to make an average of £100k a year, you could do one project every 18 months that produces £150k in profit. That equates to a GDV of £750k, which in development terms is very small. Or you could do two even smaller schemes with a GDV of £375k apiece. Simply decide how much you want to make, and work out the size of developments you’ll need to do. You’ll quickly spot that you don’t need to do mega-developments to make a very decent living, but the math works equally for those aiming for more significant returns. A big attraction of property development is that what represents a small project in industry terms can be quite literally life-changing from a personal income point of view.

The next big question is what to build? Here is where you need to be thinking about reducing risk (again). Building a £1m luxury house is riskier than building five £200k flats because, if it doesn’t sell, then you’re left paying interest on all of the money you borrowed. But if the last flat doesn’t shift, you’ll have already sold the other four and will have paid back your funders. Also, I’d urge you to build for the ‘need’ market, rather than the ‘want’ market (I’m talking 1 to 2-bed flats or houses with up to 3-beds). 5-bed detached luxury houses look nice, but they’re a non-essential purchase and can be more difficult to sell in a tough market.

You’ll also need to do your homework. Find out where the demand is in your target area and who will be buying.

Downsizers? Young professionals? Families? They each have different requirements for location, transport links, local amenities, and home design, and your local estate agents will be a valuable source of guidance. Build for your customer and never for yourself, and always focus on your bottom line. You may think those gold-plated taps look amazing, but if they dent your profits, go for something plainer. After all, you won’t be living there.

Risk crops up again when it comes to planning. Since planning permission will generally be required for most projects, wouldn’t it be great if the English planning system was ultra-modern, well-resourced, speedy, and completely free of any doubt or subjectivity? Unfortunately, the opposite is true. Although the recent Queen’s Speech announced a draconian overhaul of all things planning-related, my preferred route is still to avoid it as much as possible. I’ve seen many planning applications get terminally stuck, costing their developers both time and money. Luckily, we have a weapon in our armoury that can make life a lot easier, and it’s called Permitted Development Rights (PDRs). PDRs allow us to change the use of a building without the need to apply for full planning permission, and such is the government’s frustration with the lack of homes being built currently, they’ve seen fit to significantly extend the PDRs available in 2021. From August, you’ll be able to convert a wide range of properties into residential, many for the first time, without applying for planning permission.

How far away should your development be from you? Ideally, you want it to be within an hour’s drive from home. While you won’t be spending much time on-site, you’ll still need to do your research and due diligence before buying. Having to travel the length of the country is a bind, plus it makes for a more distant relationship with your contractor, which is a disadvantage. If you can’t find a decent project within an hour’s drive, then you’re not looking properly.

What about your workload? After all, you can’t really afford to develop property full-time, can you? Luckily property development is one of the most highly leveraged business models there is.

In fact, you won’t need to lay a single brick; a team of professionals will deliver your projects for you, plus you’ll have a project manager to oversee everything. As the developer, your key roles are to create the ‘brand’, find a team, source development opportunities, and arrange the finance. All teachable skills and roles that most people should be comfortably able to do in their spare time. However, you will need to have a little flexibility in your working day, as there will be occasions when you need to take calls and have meetings.

The final thing you’ll need as a developer is an edge. Edges come in two primary flavours. The first edge involves knowing how to make more profit from an opportunity than the competition, which in turn means you can afford to pay more for it. Luckily this is a skill that can be learned, yet it’s surprising how few developers understand how to take advantage of it. The second edge involves creating an exclusive (or almost exclusive) dialogue with the vendor or their agent, which means you’ll have little or no competition. Again, the secrets behind this are eminently learnable for the novice developer. And if you can find both edges in one project, then you’re doing very well indeed.

So, now you have some thoughts on what to look out for. You’ll have spotted that risk mitigation and getting properly educated feature quite heavily on the menu, regardless of the dish you choose. But with small-scale property development now a highly attractive alternative to the increasingly challenging buy-to-let investment model, more and more people are looking to take a seat at the table.