Nervous first time property developer

M0NEY_2

Well, when I say first time what I mean is this would be our first exposure to significant risk where the goal is pure profit and not a home we live in as we develop it.

The reason we find ourselves in this position is that we have unwittingly developed 3 properties over the last 14 years as we lives in them and raised a family, each time we have moved we have bought a bigger house but always a doer-upper and have added the value slowly over say a 4-6 year period then sold the house for a profit and ploughed that into our next house/home - fast forward a few houses and we have just bought our fourth house as a family and are now mortgage free with small savings to boot which would of been a dream to us when we first got married.

Now, here is the thing. It finally dawned on us that we now have a fair ammount of experience in doing houses and know some of the pitfalls you can meet along the way but are keen to take the plunge and try and put a bit of money into bricks and mortar towards a (Early) retirement.

The plan is to sell the house we are in now and release approx 200K as we have no mortgage then this would be our lifes savings so to speak. We intend to put a chunk of money aside for general living costs etc to last for 18 mths while we rent a house (I will still be working full time so this is really fallback money). The average 3 bed semi in need of some attention in our area sells for approx 90K so assuming this is what we buy for and obviously factor in expenses etc and say we were able to turn over a house from buy to sell in 18mths and make a profit of 15K would there be any capital gains to pay on this or will the goverment keep their sticky fingers off this, is it even legal to do what we are planning as technically it would be our second home as we would be renting while the house was developed.

Many many more questions buzzing around my head.

Hope this all makes sense.

Thanks all (First time post BTW) Phil :beer:

Sugared-frog

I've no idea about the logistics of it but why don't you get a mortgage on your current property rather than going into rented - to be more settled for your children (or are they at the point of leaving the nest?). How would that affect the sums and is it possible from a mortgage point of view?

domcastro

I agree with the above. I would take a mortgage out on the family home and use that. Don't go into rented

ader42

Remember you'll still need buildings insurance and possibly be liable for council tax etc on the developing house.
Sounds like alot of effort for a very small return to me..

But such a small capital gain would be below the cgt threshold (for the pair of you).

Doozergirl

I wouldn't touch a house for that sort of potential profit. One structural issue or a lack of buyers at the price you want and it's gone. Especially with a turnover time of 18 months. The market can fall a long way in that amount of time. The cheaper the house, the more impact the cost of unforseen work has upon your profit margins.

Sarah Beeny used to say you need a 20% profit, I'd look for more.

I'd also go with a mortgage. It will be cheaper than renting. From experience, renting just adds to the stress.

If you buy to profit then income tax is payable. If your partner isn't working then buying the house in their name and declaring it as income will save you paying higher rate. You could probably claim the mortgage repayments against it whereas you won't be able to claim the rent.

EDIT: Where is the profit if you're renting though? All of that has to go against your profit as it's money you wouldn't be spending otherwise.

Uk_Lover

15k would be fine if you could turn it over in 6 weeks but as others have said if you did this over 18 months it's hardly worth it. All it would need is something happening to the roof or similar and there's your profit gone.

00ec25

ader42 wrote: »

But such a small capital gain would be below the cgt threshold (for the pair of you).

No - as doozergirl (herself a developer) says - the OP is intending to trade as a property developer therefoe the profits will be liable to Income Tax not CGT

there is a BIG difference between what the OP has done to date, namely owning one home whilst doing it up over a period of years (CGT exempt as its your main home) and their new intention to specifcially buy a property to do up whilst not living in it - the latter is deemed to be trading and so ineligible for CGT

princeofpounds

Be aware that if you have been buying and selling property for the last 14 years the vast majority of the profits you would have made over the period would derive from rising property markets and have nothing to do with any work you have done on the properties, unless you took basically uninhabitable properties into showhomes.

That's why so many amateurs have become enthralled by property development over the last 15 years. They think that it's down to something they did, when in fact they have probably been irrelevant to the business outcome.

That's not to say that you aren't able to source proper deals or make money, but if you don't understand this general point then you won't be able to judge your own capabilities.

Annisele

To add to what PoP says, I'd be tempted to try to guesstimate how much of the profit you made is actually down to the work you did.

For example, say you bought for £100k, spent £20k on doing the place up, then sold five years later for £150k. That sounds like a £30k profit.

However, if you could have bought the same house for £100k, done nothing to it, then sold it five years later for £130k, your efforts didn't produce a profit at all. Worse, if you could have sold the unmodified house for £140k, the £20k you spent actually produced a £10k loss. And once you start costing your own labour, even if only at minimum wage, property development can be a giant money pit.

Idiophreak

Seems a lot of hassle for a small return. You and the OH are looking at making 5k extra each per year. Would be easier to both go work in Sainsbury on a Sunday and achieve the same thing, with a lot less risk.

david29dpo

Your biggest problem these days is you will not know the selling price with any certainty.
In the boon days (prior to Aug2007) it was fairly easy to know (and get) your selling price (buying price, costs etc = profit)
Not any more! Example..... The last one i did went on the market the day Northern Rock went tits up! (Aug 2007) Been rented out since and if sold now......£20K loss.