Starting of in property development - funding options

spdavies

Dear forum,
Sorry about the potentially specific nature of this question but hopefully my situation is simlar to that of others and may help more than just me.

I am looking to get started in property development in the new year and want to understand my options a little bit in detail before talking over the specifics with a financial advisor.

I currently earn about 37k and have an outstanding mortgage on my own property of £135k for a property worth £190k. I aim to have about £5k in savings.

I am looking to raise approx £100k for my new venture (90k mortgage and £10k development costs inc fees).

As far as i can tell i have the following options to raise the funds;

1. Equity release from my own house (although suspect i'll be limited to the value of the house i.e £55k
2. Remortgage my property
3. Apply for a new mortgage (will banks do this for me if i already have a mortgage - given my earnings)
4. Obtain a loan - limits? repayment costs might hurt!

My current feeling is that a combination of equity release and loan might be the best (if i qualify). Do any of you clever people have a view on whether this is the right approach and whether banks are likely to offer me this based on my earnings?

Thanks

Pobby

Is this a good idea right now.A few years ago I would have said yes but things are far less certain now.If the market is stagnating or even falling it will be difficult to realise much profit imho.

toonfish

every man and his dog is a property developer now. It is an intriguing business but if you are borrowing the whole cost of purchase plus development, don't forget to factor in mortgage/loan repayments, stamp duty if applicable, legal fees, estate agents fees - you are going to need to find some pretty few and far between homes to make a go of it.

"self-build" is the classic way to get started, or buy-to-let refurbishments but the difficulty is in finding the right property.

Conrad

Common way is remo own home (say to invest in another - development is not a word lenders like to hear), then obtain B2L mortgage with lowest rate and no early repayment charges - with the 'intention' of letting the place. Beware some lenders might want a tenancy agreement prior to completion, mind you some would have thier errmmmmmmm brother or father Xmas sign as the 'tenant'.

This is not advice I'm giving, just telliung you how the real world operates. None of this you will find in a 'how to be a developer' TV prog.

CARE - developing is hard, if it was easy I would do it myself but the figures never seem to add up.
I always assume I will have the place 6 months minimum - sao many developers get burned by not allowing enough time - rememeber buyers often pull out tat the last minute.

So get a large piece of paper and do your sums properly.

Costs should include;
1) 8 months interest on the new mortgage
2) 8 m on the existing mortgage you are topping up (this cost is always forgoton on the TV progs)
3) Development costs - over estimate and then add 20%
4) Lost overtime or wages for you if needbe
5) All buying and selling costs - dont forget 'interim interest' on all mortgages - another one the TV muppets forget
6) Tax - this often is the killer for me and why I turn away such projects.

Be realistic and assume the market will crash and be hard to sell on - have a back up plan for this.

A client of mine did his first project this year, funnily enough I spoke to him today and asked how the sale went (he had assured me the place he had bought was 'way underpriced, and would sell immediately'). Imagine my surprise (not) when he said "oh, we were forced to let it in the end"

spdavies

Dear all, thanks for all the advice.

I appreciate the uncertain nature of the housing market at the moment and all of the advice above i am making sure that i am taking into account. As part of the business plan that i am making i will be looking at case studies and developing a fairly comprehensive costing forecast (including fees etc as above) to make sure that the venture is vaible.

I am still a strong believer that there is a viable career to be had out there with the right research and initial investment. My plan is to find out as much as i possibly can and monitor the market over the next 12-18mths before investing. The main area that i am currently struggling with though is how best to raise the initial funds to get going and any advice would be welcomed here..

I plan to do this part time in addition to my current job with an aspiration to go full time in the 2-5yr time frame (market dependant).

Thanks for your help so far - keep it coming please..

lynnexxxo

Hi there

What sort of property are you looking to buy for 90K - and spend less than 10K on the work (including fees). Are you planning on doing a lot of the work yourself? When are you going to have the time - remembering that every month it takes you is another say £600 on interest on your 100K loan.

Say it takes you six months to do the property up and sell it - thats £3600 in interest alone + say 1k of solicitors fees (ok rough figures) but thats nearly half of your 10k budget.

spdavies

The plan is to buy 2-3bed properties that need a cheap and cheerful overhaul and turn them around within fairly quick timescales. My wife and i intend to do most of the work in the evenings, weekends and holidays initially to get going with an aspiration of doing it full time in the long run. I have spotted a number of potentially suitable properties in the local areas to indicate that this is possible and plan to start looking seriously in the new year.
The plan is to turn these properties around quickly and sell within 2-3 month periods making a profit of around 15-20%. I can't post the spreadsheet onto here but i think i've taken most things into account and can still make it work.

One thing i'm not clear on is tax. I believe i have to pay tax on the profits but i'm not sure which bits exactly are taxed and by how much (i.e. is it the difference between the sale and purchase - what about costs etc??)

To all you financial advisors out there - is this the sort of thing i should be able to discuss with a FA along with my costing assumptions and funding options???

lynnexxxo

Best of luck then, I had at one point hoped to do a similar thing but with it seems in my area with everyone watching property ladder and the likes folks seem to be paying almost as much for a 'doer upper' as for a developed house.

[Deleted User]

Hahahaha you go right ahead and lose your borrowed money. Your marching head first into a bear market. The bear will knock your head off, especially the polar type, although those chinese panda type bears will go easy on your but panda love can hurt you.

The smart moneys in the top selection of gambling, booze, food, mining, energy, oil stocks right now. Bull to follow with undervalued stocks being worth 3 times what they are actually worth, just ye watch la madness and make me maketh mad money

Property is a investment, it only goes up dont ya know

guppy

I would second lynne's post.

In my area even the potential nightmares at auction seem to be sold to "developers" for a fortune. That said, up until the present, there always seems to be some other mug who will pay enough to cover the developer's costs. I'm not sure that will hold true for much longer now though.

Good luck if you can make the sums add up. Frankly 20% net profit in 3 months sounds ridiculous if you are talking about a new kitchen, rewiring and a coat of paint. I'd have thought you'd be lucky to increase the capital value of the property by that much, let alone after deducting your costs.

Part of me wonders if this is a wind up.

homer_j_3

"remo your home and word it so the lender likes it".
"get a buy to let mortgage with no tie ins and say you are letting it..."
"Not advice but just telling you how the real world is"

translates in to

"put your own home at further risk due to an increase in mortgage payments - which you need to do through a twisted truth"

"lie to the bank so you can get the funding back off your house as it should never have been there, which again you need to play the game of lying"

"I know its not right but if you are stupid enough to be a lemming - then go ahead and jump off that cliff"

Unfortunately, this does happen a lot and historically the risk has been low to everyone involved. You ask any professional property developer if this is the way to do it in todays world and see what they say. Its madness - you will over indebt yourself more than likely with the market today and end up on panorama in a few years time no doubt!