Property development can be a great way to make big profits relatively quickly – but it does involve time, effort and a starting investment. If you get this right though, the paybacks are huge.
Find out how I made a £190,000 profit (211% ROI) in two years from developing property through doing some research and putting in hard work. I did this with my family home and by doing no work on the property myself.
Property development is essentially the term used for somebody buying property at a certain price, then developing it to increase the value in the property.
What you then do with the property is up to you, but the options are to sell again for a profit, rent out for better yield than you would have have achieved prior to the development, or you could live in it.
What investment do I need for property development?
It’s really important that you are aware of the fundamental costs involved in property development, and you don’t need to start with a project as big as mine. I bought a house for £375,000 and the development budget was £111,000 on top of that.
You don’t need to start out with a property that requires this much investment, and I certainly didn’t have £111,000 cash for the development. Most of this was borrowed.
So how much did I start with?
I started out with £94,000 cash and a few loans here and there. I will come on to this later, but I have now turned that £94,000 in to £190,000 in two years!
The investment that you need to start a property development project need to cover these four things:
- A deposit for the property
- Solicitors fee’s
- Stamp Duty
- Some cash for the development (only a percentage of what is needed in total)
In relative terms, if you were starting out with £25,000 cash, you could start with buying a house roughly valued at £100,000.
I believe that between 50% and 75% ROI (on your original investment) is a good rule of thumb for terraced or attached properties between £50,000 and £250,000 .
If you are buying a detached or semi-detached property above £250,000 then you can get closer to 100% ROI. This is obviously dependant and relative to the location and geography of the project.
Just a note that these ROI numbers are dependant on you keeping the property, renting or living in it. These figures would be adjusted down if you were selling the property for profit, because any profit would be taxable if the property was not your home.
Where to look for property
The first thing you need to do is recognise all of the places to look for property. There are many different ways to look for property, but before I give you the list of places to start, I’m going to share that I found my property in the most obvious place possible! I found it on Right Move.
There are many potential goldmines on Right Move however this can be a very competitive market, and the good deals do get snapped up quickly, especially if they are undervalued or in the good locations.
I got lucky! I happened to look on Right Move minutes after a property was listed, and the good news for me was that it had fallen through twice already, therefore.
This means they had dropped the price from £425,000 to £400,000 for a quick sale, and with my inquisitive head on, I found out that they had offered on another property, therefore anxious to sell quickly. In comes an offer from me for £375,000 within a day of the house going on the market and everybody is a winner.
The other reason I was able to offer this amount was because the house was unloved for twenty years and they knew as much as I did that renovation was needed.
They get to continue their move to the house they had already offered on, and I get an absolute bargain that hasn’t been spotted yet by the masses. Yes i was lucky, but these opportunities do occur.
Play this game strategically by making friends with the local estate agents, and ask for a heads up on any properties coming back on to the market as a result of a failed sell. Usually people will have set their sites on the purchase of a new house, and quote often will drop easily from the asking price.
Other places to look for discount property:
- Finding properties that look empty or distressed, and contacting the owners directly
- Local marketing, like leaflets and small ads
- Online marketing
- Your network of other investors who might have spotted a deal that doesn’t quite fit for them
Before you start looking though, there are a number of things you should be looking for.
What to look for in a potential development
You are going to need a checklist of criteria when searching for your property development project. Will you need to buy locally to fit your schedule and desire to stay close to your development, or are you prepared to travel?
Property development can be lucrative in student accommodation areas, up and coming areas, as well as already affluent areas. I think if you want to maximise your investment then I would urge you to go for one of these types of property. If your development is outside of these criteria then you could be sat on a house that nobody wants to buy.
Avoid sitting on something that doesn’t sell, by asking yourself why this property is different? If it’s one of 45 house the same, then you will need a good reason for somebody to buy it when it’s finished.
I would only buy a house that is similar to others if has lots of land and you can increase the size, whilst maintaining a good size garden afterwards.
Corner plots are ideal for this scenario because you can usually end up with the same size garden as your neighbours, but with a bigger house. Unless it’s this scenario, then dismiss it and go back to my three criteria.
The next question to answer is; ‘what is the opportunity to increase the value?’
If there isn’t one, then why are you buying it? Yes, it’s important to create some instant equity by buying something cheap, but you must have a potential opportunity to increase the value further. Sometimes the value will be created by the fact that the property needs cosmetic changes, but in order to create real value, think big!
Here are some ways to create value in a property:
- Can additional living space be added without compromising the quality of the garden?
- Will cosmetic changes to the kitchen and bathroom increase the value above and beyond the renovation costs?
- Are there opportunities to reshape the living areas to create better sized rooms? i.e. maybe two rooms are too small, but the bathroom is too big.
- Would reshaping the property make it more appealing? i.e. changing the entrance location, putting the kitchen at the back of the house, divert walkways to make it more practical?
- Can you add rooms without needing an extension? Create a downstairs toilet, utility or office?
- Is there any bizarre DIY that you can reverse and return back to normal?
- Can you buy some additional land on the side of the property in order to build an extension?
- Is there a loft you can convert in to extra bedrooms?
- Can you clear dead and undiscovered space in the garden?
- What can you do to the outside of the property in order to create a modern house? i.e. render cheap looking bricks.
- Can you do any of the above without planning applications?
There are lot’s of ideas here to be getting on with, however I actually combined several of these ideas in order to create large profits.
How did I create a 211% Return on Investment?
When I viewed the property, I spotted many of the above opportunities, and therefore it felt like a safe investment. If you can tick as many of these criteria as possible, then you will increase your chance of success.
Here’s what we did for our property investment:
- The house was cosmetically run down, therefore a complete renovation was required inside and out.
- Two of the four bedrooms (bedroom 3 and 4) were two small, but the landing was too big. We moved some walls and gave some of the bathroom space to the bedrooms.
- There were two bathrooms and an on-suite upstairs, so we decided get rid of one bathroom and allocate the space to bedroom 3.
- The second bathroom was very big, so we gave some space to bedroom 4.
- We took out the pine fitted wardrobes, doors and skirting boards, and replaced with oak doors as well as fitted new plain wooden skirting boards.
- Built a ground floor extension and moved the kitchen from the front to the back of the house, creating an open plan living area with bi-folds to the garden.
- We reshaped the rest of the downstairs living space, and put a utility and an office where the old kitchen was.
- Put a high spec kitchen in to the property.
- Put new premium quality fencing around the outside of the property, as well as built a new patio to meet the level of the bi-fold windows.
- Landscaped the garden.
- laid a new modern stone on the driveway.
- Decorated the property throughout.
We transformed the property in two years, however if we weren’t living in the house, it would have only taken about 7 months after receiving planning permission
Borrow money to maximise your property development!
Let’s take a look at how I used other peoples money in order to maximise the opportunity on this property.
First things first, I used a £60,000 deposit to purchase the house, and paid the £9500 stamp duty and solicitor fee’s.
Once I had purchased the property, I then applied for a home improvement loan to do the work. I was accepted for the loan and therefore borrowed £86,500, combine that with my remaining cash of £24,500 to give me my total of £111,000.
This was such a key point in my success, that I was able to borrow somebody else’s money to do the work at a low interest rate. As long as you do your homework and you know what the valuation of the property will be after the work, this really is a safe way to get the cash.
It was borrowed at a reasonable rate of interest, and therefore, only had to pay the repayments while the work was being carried out. Once the work was completed, I was planning to remortgage against the new property value, and pay back the loan.
Two keys things here; 1) Get a valuation for the property against the proposed plans, and 2) Make sure you are in a position to re-mortgage when the work is done. This is possible by either having a flexible product, or by doing the work when a fixed mortgage period has finished.
If you want to a great way of creating funds for your property development, read our guide to making £1500 per month
The finished result
So after two years after buying the house, the property has just been valued by three agents, and the mid point valuation is £650,000. Obviously a slight rise in house prices over two years has contributed to some of this increased value, and therefore a quicker project nay not return quite as much, but the increase would still have been significant.
So, when I deduct the current mortgage value of £370,000 (post remortgage), from the property being worth £650,000, I end up with £280,000 equity. That means I turned my £94,000 cash in to £280,000 at an ROI of over 200%!
If you can do any work yourself you could have increased this profit.
As the renovation was going to take me two years, I used my cash for the upstairs renovation first, and did the extension with the borrowed money afterwards. That way I was only repaying the loan amount for the downstairs over a small period of time.
This just goes to show that with some research and planning, you can create profits or equity in your home relatively easy. If you consider that I did this while working, the fact that I had to wait two years for the return on investment was really no problem.
If you want to create spare cash for your property development business, read our guide to home based business ideas.
High & Wise