The general perception is that you should work your way up to development by doing more straightforward strategies first, such as single lets or HMOs. However, any developer worth their salt could tell you this is bunkum. Being a landlord does not automatically make you a better developer – developers have no tenants, nor do they have to comply with the same set of rules or even employ the same set of professionals in the main. In fact, not only does not being a landlord prevent no barrier to becoming a developer, but you’d also have to say that becoming a developer first makes better sense financially unless you’re swimming in cash. That’s because the average buy-to-let deposit is currently an eye-watering £70k or so, which begs the question, how will you find this money if you don’t already have it? One obvious answer would be to do a small-scale development first, which will then give you your deposit in relatively short timescales. You can then get your buy-to-let journey started more quickly.
Now, I’m the co-founder of a property development training company, so I’m clearly going to be completely biased; however, you’re free to stop reading if you think any of what I’m extolling in the following few paragraphs doesn’t make sense. The first thing to point out is that these are not strategies or flavours; they are, in fact, business models. Any money-making enterprise is a business, and you should approach each one with a business mindset. Unfortunately, very few people have ever been taught how to run a business. It’s not a subject they teach in schools, and they don’t, as a rule, teach it in colleges or universities either. So the first exposure that most people have to running a business is when they suddenly decide to start one, and this includes investing in property. So, for most of us, we’re in at the deep end.
The statistics for new business success make for interesting reading. Apparently, 20% of new businesses fail within their first two years, and 45% fail within five years. Presumably, the number of people who thought they would be in the other 55% who made it beyond year 5 was 100%, which demonstrates an admirably plucky spirit, albeit reality would have probably had something to say on the subject had it been asked. Of course, no one embarks on a venture expecting disaster. Still, the relatively high failure rate would suggest there’s more to running a business than simply opening a bank account and printing some natty business cards. Yet because no one routinely gets told anything about this fact during their statutory education, most go into business in a blaze of heady optimism and relatively little knowledge.
But, in the same way, I suspect you’d still have been able to look at Sir Clive’s C5 venture with a critical eye, so we need to adopt the same critical thinking when it comes to a property business. Two key areas you need to consider are the marketplace and the product you will put into it. The first key question here is, ‘Is there a demand for what I’m going to sell?’ Now, if we start with development, I think it’s safe to say that there’s a huge demand. The government has, up until recently, resolutely clung to a target of 300,000 new homes that needed to be built each year, of which we would typically manage to build around half. Bear in mind that there are around 275,000 homes in Oxfordshire, and you’ll get a sense of the sort of scale we’re talking about. The problem is that if we only build 150,000 homes in one year, then the target for the following year shouldn’t stay at 300,000 – instead, it becomes 450,000 since we need to play catch up, and so on for subsequent years. In short, there’s a massive demand for housing, particularly if you’re building in the ‘need’ market (starter and small family homes) rather than the ‘want’ market (luxury detached) because we’re under-building every year. This means there are more and more potential customers every year who need housing but can’t get it.