Starting of in property development - funding options

Dithering_Dad

spdavies wrote: »

... it disappoints me a little that people think i am entering into this venture on the back of watching a few tv programmes. Of course i watch them (never get too much info) but i am more intelligent than that and would only set up a new business based on facts and significant market research.

I think this may have been my fault, whenever I hear about people making moves into the property development game, I always wonder if they have been watching a little too much TV.

There was nothing in your OP to indicate that you had carried out any market research or had any specific skill that would allow you to succeed where others have failed (such as having building, plastering, carpentry, electrical, plumbing experience, which would mean you could do a lot of the work and so reduce costs). The original question was actually of such a naive nature that it made alarm bells ring with me, and by the response in everyone else as well. i.e. a person with very little housing equity and very little in the way of savings (5k) was looking to increase an already large mortgage in order to move into a market that is teetering on the brink of a crash and full the the gunnels with people doing the same thing already with more experience and greater capital behind them.

We're just looking out for an MSE chum

bobsa1

Op as you are keen to property develop I will offer a bit of my own experience. I have built up a good relationship with a couple of estate agents, one of whom specialises with deceased estates, I also have an excellent financial advisor, with whom I have a good track record, thus we are able to get mortgages on difficult to mortgage props with a 20%deposit.

We tend to go for props which need lots of work, however I think there is good money to be made from props which are just dirty, messy and in need of a good clean and upgrade. Whilst you will be paying more for these, you will spend less doing them up and they will be able to be worked on by you and your partner.

Tradesmen cost a lot and can be difficult to get at the time you need them, hence doing as much work yourself as possible is probably the way to go.

Have an exit plan, ie if it doesn't sell quickly what will you do? we are able to switch from a dev. mortgage to a buy to let very easily and therefore can let a property which hangs around for a while.

Area is key, buy where people want to live.

Hope this is some help.

Bobsa

toonfish

OK from my experience, and in my area (Somerset/Wiltshire) there is no longer any money in "doer-uppers" - everyone is after them to live in as house prices are unaffordable for many and the cost of purchase plus work is less than you will sell for once all fees and costs are taken out.

Total renovations are still OK - if you can find them and this needs you to get tight with an estate agent (usually by paying them a few £ in a brown envelope).

You can get 85% on an uninhabitable property, 90% if it's fit to live in. Alternatively you can buy at auction with bridging finance an if it's cheap enough immediately remortgage and get your deposit back.

Another area you can make money is converting larger properties into flats/apartments, providingyou can get the planning and personally I am now looking at mixed use residential/commercial stuff - harder to fund but more profitable long term (not so good for quick turnaround).

[Deleted User]

More important then anything do a investment appraisal, risk analysis and project plan. If you have no experience of doing these three tasks then making money would be more down to luck then any skill. In which case it would be the equivilent of putting 10K on black at a roulette wheel.

You also need to analyse the economic situation of the area, house price trends and turnover of houses. Otherwise you could be buying into a area that will see a 40% drop in house prices by 2009.

PS part of your risk assessment and monte carlo simulation on the economy you need to analyse the effect of the reduction of tapered relief on CGT for BTL investors this will want many BTL investors to unload there properties before 2009. This combined with analysts predictions that the full extent of the american subprime mess will be felt in late 2009. The percentage chance of a 1990 style housing market has been increasing somewhat over the last year.

happy hunting

spdavies

Yant1, ditheringdad,Toonfish and Bobsa - Firstly thank you very much, this is exactly the sort of debate that i was looking to initiate.

My expertise lies in project management and risk analysis so i do believe that i am in a position to undertake a thorough programme of research over the next 1-2 years (or longer if the housing market dictates). I also have personal experience of doing up 3 houses (admittedly mostly cosmetic but i have acquired some useful DIY skills that i can put to use).
The housing market drop does concern me but i am a big believer that where there is a negative there always concludes a positive for someone. The drop will hopefully only be fairly short term and it may even benefit me with lower house prices when i am looking to buy.

The changes in CGT confuse me. My understanding is that the tax is now reduced to 18% on property sold if not your primary residence. So in simple terms if i was to sell a property for 100k that cost me 90k would i be charged 18% on 10k or would costs be taken into account before hand (if so which)?

BTL is an obviious exit strategy and i think with some careful consideration and tenant management i could afford to do this given my current situation (or certainly when my wife goes back to work after her maternity period). Alternatively i could always sell my own property and move into the developed property (although this is obviously less favourable).

Bobsa your strategy seems similar to my intentions. I am not adverse to total redevelopment but initially i am after low risk low profit properties whilst i build up my portfolio and funds.

I'd still be very interested to hear how you sourced the initial funding to get you going? Was this through savings. Surely some of you must have been in a similar financial position and needed to borrow to get yourselves started.

Toonfish you say that You can get 85% on an uninhabitable property, 90% if it's fit to live in. Alternatively you can buy at auction with bridging finance an if it's cheap enough immediately remortgage and get your deposit back. Please could you expand on this? What do you mean by bridging finance and then remortgage (is this above board - how would i do this - are there any pitfalls?)

Thanks again

toonfish

OK bridging finance is a short term-loan, maybe for a set period eg 4 weeks or can be open ended at a high rate of interest. It will be secured on th eproperty you are buying or your own home. It is then possible to remortgage to a conventional lender at the true value of the house, rather than what you paid for it.

As an example the house is worth £100,000 - you buy it at auction for £85000 with a bridging loan, then immediately effect an 85% remortgage on a buy to let rate and repay the bridging loan.

There are loads of ways.

Another thing to look for on decent developments is private investment - I can get £100K cash easily but the chap wants 1-2% per month depending on the deal. This wouldn't be viable for small refurbs really as there is not enough margin.

Initial funding if you don't have it will be personal loan, probably secured on your own house.

homer_j_3

Seriously - DIY skills and project management don't carry much weight when it comes to becoming a property investor.

Project management will become useful when you can apply the order in which jobs need to be done and when and how long they will take.

I project manage stuff every day - they are called my clients and I am good at it because I know my subject. I have project managed call centres being created - I was good because I knew my subject.

You need to understand what order to do things in from a builders and tradesmans point of view. If you don't know or dont get to grips with this then it could cost you a lot more than you thought. There will be no set formula either - it will be down to each project you do - hence why a good builder/architecht will often be a good person to make sense of the jobs that need doing.

But before you even get a chance to transfer your exisiting skills, you need to establish good relationships with Estate Agents and be able to negotiate hard with them (but fairly) without falling out with them. This is key and hence why brown envelopes and £ are not uncommon. The good properties will often go to experienced developers where agents know they are not time wasting proerty ladder viewers. No slur on you here but thats what 99% of people are percieved as when they walk into an EA and say - im looking for a property to develop or do up!

You need to be able to turn properties around very quickly. The properties with smaller profit levels are just as high risk in some cases as those with larger ones because you fail to sell, your profit disappears a lot more quickly.

You will need to get a team of trades people too as DIY can actually decrease value if it looks to be done shoddily! GSI I say - Get Someone In!

Funding information - you can use the equity from your house, you may be able to word your application to a bank on the assumption you will rent it out but suddenly need the cash when its fit for habitation etc. You may want to approach your bank as a business for commercial funding - there are many options and depending on the property you find, the answer may be different.

The responses on here are not being negative, its being realistic.

The formula is simple to doing what you want to do - buy low - sell high & spend as little as possible to do this. A lot of problems that people face when trying to do this is:

The sellers always want premium price for property because of the market they "think" they are in so you don't buy low

The new developers will often mis understand where they should and should not spend money so you spend more than you needed. You can often end up paying more for work to be done too through niavity or not having the right people in.

The market isn't as strong as they thought and often fail to plan for full costs of buying, selling, work to be done, mortgage costs etc. You don't sell high but end up taking an offer as you need to minimise your costs etc.

result - a feeling of "well that wasn't worth the time"

Buying a do'er up'er is not going to turn any profit if its only a few grand less than the one done up.

You may find the odd gem out there but I am guessing that at this very moment in time - it will be more than likely that its through luck and a change in market conditions or someone that is selling rock bottom to get shut of the repo men!

guppy

homer_j wrote: »

But before you even get a chance to transfer your exisiting skills, you need to establish good relationships with Estate Agents and be able to negotiate hard with them (but fairly) without falling out with them. This is key and hence why brown envelopes and £ are not uncommon. The good properties will often go to experienced developers where agents know they are not time wasting proerty ladder viewers. No slur on you here but thats what 99% of people are percieved as when they walk into an EA and say - im looking for a property to develop or do up!

Very true. EA will likely also want to deal with developers who will give them the commision to resell/let the property once its finished. Double bubble.

Where I live, fixer uppers go for so much (to FTBs and amateur developers) that in reality its probably most profitable for EA's just to stick them on the open market. The gap between prices of wrecks and merely average properties seems to be shrinking all the time.