The relatively simple conversion of retail uppers into flats or offices into apartments will typically produce a healthy six-figure profit over a relatively short timeframe, say 18-24 months. Compared to the more glacial growth of buy-to-let equity, this regular influx of cash allows landlords to build their portfolios far more quickly than simply waiting for their existing properties to increase in value. But surely development is more complex than doing up a buy-to-let? In many respects, it is, but not usually for the developer. You see, when most landlords refurbish a buy-to-let property before renting it out, they will typically hire a jobbing builder and will oversee the works personally, effectively becoming their own project manager. But with a small commercial conversion project, not only will they be able to afford a main contractor, but they can also afford to hire a professional project manager to oversee the project for them. Ironically, the developer makes more money by doing less work, and this ‘hands-off’ approach makes small-scale development a big attraction for people looking for a more passive wealth creation model.
So, exactly how big are these small-scale projects? There’s no definitive scale; however, as a ballpark, you’d typically be looking at schemes that would have a gross development value of between £500k and £2.5m and which would produce target profits of £100k to £500k. Now, this raises an obvious question; surely you will need lots of money to tackle one of these projects? But here lies another common misconception. You see, a development project will often require you to invest LESS of your own cash than a buy-to-let property will, and by some margin. There are two main reasons for this; firstly, the commercial lenders who finance developments are happy to lend up to 70% of the purchase price and 100% of the development costs. This leaves you to find a circa 30% deposit, which is not a million miles away from a typical buy-to-let deposit. However many lenders are will allow you to borrow the bulk of your deposit from private investors, rather than funding it entirely yourself.