Property Developing Question

Diamond1

I'm thinking of possibly trying to develop property and would like some advice from anyone who has done this or are relatively new at it. I will have around £75k to use but am of course reluctant and a bit nervous about such a venture. Ideally I would like to buy something that needs a refurb to sell on and then maybe buy another and do the same. I know there are no gaurantees as to profit margins but does anyone have any input to give me on this?

ILW

Buy somewhere cheap, spend as little as possible on it and then sell it for a very high price.
Any further questions?

princessamy86

Develop an incredibly thick skin, as most investors I know play it as a numbers game. They'll offer very very low on a lot of properties, and eventually someone will bite. Also consider buying at auctions, you can often get properties for below market value. However, you're certainly not the first to want to do this so you need to be prepared to act fairly quickly if a desirable property comes on the market! (And by desirable, I mean investor desirable). Best to make friends with the estate agents, they'll be the ones who choose to ring you the moment the HIP is back rather than letting you wait until it appears on rightmove-which incidentally is broken A LOT with properties often taking up to 5 days to appear on there. Personally, I would never buy anything I couldn't rent out, if the worst comes to the worst and you have to keep hold of it then at least you can get an income off it.

Diamond1

Thanks ILW and PrincessAmy86. I wish there was an easy answer to all this. I'm petrified of letting so much money go into a property venture not knowing whether or not I'm doing the right thing. I watch all of the property programmes and most people seem to make good profits on properties they buy to refurb and then sell on. I know under the current climate I could probably go in at a low price and possibly be successful getting it. It's whether I would make a profit after the refurb cost. As you suggest, it's probably best to chat to an Estate Agent from here.

Thanks again.

princessamy86

Make sure you brush up on your tax liabilities as well, capital gains can really eat into your profit margin. Do you know anything about property?

ILW

Diamond1 wrote: »

Thanks ILW and PrincessAmy86. I wish there was an easy answer to all this. I'm petrified of letting so much money go into a property venture not knowing whether or not I'm doing the right thing. I watch all of the property programmes and most people seem to make good profits on properties they buy to refurb and then sell on. I know under the current climate I could probably go in at a low price and possibly be successful getting it. It's whether I would make a profit after the refurb cost. As you suggest, it's probably best to chat to an Estate Agent from here.

Thanks again.

I think many of them programmes are repeats from a few years ago when it was very easy. Also they tend not to show the ones where it all went wrong. Can you afford to lose money if the first does not work out?

princeofpounds

I think the main thing you will have to figure out is that property development is a financial and numbers game, and actually building or renovating the property is a relatively small part of getting a successful business.

When you make a business, you are basically trying to maximise your return on equity. Equity is the money and resources (including your time!) you put into the business.

But having a profitable business is not enough for it to be a worthwhile business. You must weigh up the returns available with the opportunity cost of equity and the risk involved. So for example if you are making a 5% annualised return on equity with your profit then that's great, but you can almost that much in a bank account with no risk. Plus, you could go and get a second (or first!) job in the time that it took to do the development, so you are also sacrificing a wage. Finally, property development is risky so you should demand significantly higher returns than the other options available to earn money.

One important feature of the property game is leverage. People try to maximise their return on equity by taking out debt, which is a fixed claim on the profits rather than the variable claim of equity, which gets all the profits (or losses) left over. They do this because they get more capital to invest on top of their equity, and they hope to get extra return on equity by making the return on total capital greater than the cost of the debt.

This is easier to see in numbers... If you buy & invest in a house for a price of 100 with equity, then you renovate and sell for 110, then your return was 10%.

But if you buy with 70 debt and 30 equity then after selling the property for 110 and paying the 70 debt back you will have 40 left over - your return on equity was 33%! (In reality it would be lower as there are interest costs involved in borrowing but I have ignored those for sake of example)

But, here is the catch. If through no fault of your own there was a problem in the project or property prices started to fall, and the house sold for 90. You still have to pay off the 70 loan. You now have only 20, and so 33% of your cash has disappeared from only a 10% price move!

Leverage amplifies returns and losses, and so is part of the risk of the game. Many people in the housing boom thought they were skilled at development when in fact most profits came from market moves amplified by leverage. They weren't making any money on the actual core business but on financial speculation. When that goes wrong, it was very painful for all of them.

Diamond1

Hi princeofpounds. I did think that maybe if I went into partnership with someone I know that I can trust who is in the buiding trade himself might be another option. I would of course make sure that it was all done through a solicitor so that everything is being done above board. Just another thought to add to the others I have racing around in my head at the moment!

princeofpounds

Building isn't development. Building is only a part of development. Many development companies do no building at all and subcontract the actual physical work.

Development is about generating the business strategy, financial and project plans, organising the transactions etc.

googler

ILW wrote: »

I think many of them programmes are repeats from a few years ago when it was very easy. Also they tend not to show the ones where it all went wrong. Can you afford to lose money if the first does not work out?

Seconded. It looks great until you realise it looked great in 2005, 2006..... but maybe not now.

However, someone else around here says they've had their 'best year' at property developing in 2009.... but they don't seem to be new to it, as you do.

Is your £75k the budget for buying something, refurbing, and covering all costs involved in selling or renting out after you're done?

david29dpo

Afraid you have missed the boat by about 4 years. However i got back on 2 weeks ago with a repo going cheap. As said, make sure you can rent it out if necessary.