Do property developers have an infinite money tap once they have built and rent their properties?

user225688

I was wondering what the continuous running costs are if a company has a few developments of apartment complexes they built with say 50-100 people per development of young professional targetted type of builds.

I am guessing it takes a couple of million to get everything built for each development? but once they are built the running costs would be nothing compared to the money they make; a couple of grand here and there for odd repairs. If rent is average £600 per month per person (I am using a low estimate there) x say 50 people = 30 grand per month x 12 for a year makes £360k per year. So it would take them maybe 5 years to have paid back any loans or whatever they used to pay for the building of the properties then after that they just have an almost infinite torrent of money coming in. And that is only for one complex and these guys are building new ones all the time.

So they must be multi millionaires? and multiply it every year or two?

I surely don't know what the overheads are which is why I am asking...are there any significant costs eating into their ongoing turnover because I couldn't thing of any. I admit to be woefully ignorant (so you do not need to point that out to me, it is why I have asked the question, in order to learn more) in these areas as I have never really thought about it before but I recently started wondering about it since I have lived in a couple of properties in the past few years which are private developers who also rent out the properties themselves once they are built and wondered what their actual costs were once everything was built - how much they have to pay back (either to their own coffers or a bank's etc) before it becomes all profit for them etc. This is what I am asking about.

Is it the 'life of riley' once they are setup and have a complex mostly occupied or not so much?

RelievedSheff

You have greatly underestimated the build costs there!
You won't get the land for a couple of million in most cities.

davidmcn

For starters, the costs of building a property (including buying the land in the first place) are much more than 5 years' worth of rent.

Comms69

user225688 said:

I was wondering what the continuous running costs are if a company has a few developments of apartment complexes they built with say 50-100 people per development of young professional targetted type of builds. - The leaseholders will pay this. 

I am guessing it takes a couple of million to get everything built for each development? but once they are built the running costs would be nothing compared to the money they make; a couple of grand here and there for odd repairs. - vast majority of developers don't built to let.  If rent is average £600 per month per person (I am using a low estimate there) x say 50 people = 30 grand per month x 12 for a year makes £360k per year. So it would take them maybe 5 years to have paid back any loans or whatever they used to pay for the building of the properties then after that they just have an almost infinite torrent of money coming in. And that is only for one complex and these guys are building new ones all the time. - a 50 flat development will cost cost WAY more than a few million. 

So they must be multi millionaires? and multiply it every year or two? - no

I surely don't know what the overheads are which is why I am asking...are there any significant costs eating into their ongoing turnover because I couldn't thing of any. I admit to be woefully ignorant (so you do not need to point that out to me, it is why I have asked the question, in order to learn more) in these areas as I have never really thought about it before but I recently started wondering about it since I have lived in a couple of properties in the past few years which are private developers who also rent out the properties themselves once they are built and wondered what their actual costs were once everything was built - how much they have to pay back (either to their own coffers or a bank's etc) before it becomes all profit for them etc. This is what I am asking about.

Is it the 'life of riley' once they are setup and have a complex mostly occupied or not so much?

Ye you're forgetting lots of things. e.g. TAX!

Browntoa

And most developers sell on the maintenance and leasehold to 3rd parties who bleed residents dry

eddddy

Taking a step back, if what you said was true - it would tend to be 'corrected' by the market.

In simple terms, if property development companies were making huge profits compared to the profits other companies make - more and more companies would get involved in property development.

The result would be that there are more flats available for rent, which would mean rents drop. As a result of lower rents, the profits made by the property development companies would reduce to more 'normal' levels.

That's a very simplified view, but I think it's fair to say that property development companies probably make similar levels of profit to many other types of company.

user225688

Ok, but could you guys give me some sort of figures of each thing mentioned,(which you said I was erroneous on), plus any I didn't mention which are involved, to get a clearer idea in my mind?

Where is all the money going then, ie, total costs vs total profits?

princeofpounds

There are so many issues I could cover to give you a full answer. But given the constraints of time, I'll have to be brief:

- Yes, if you build a development of flats and rent it out, you will have a large income stream. Exactly what that is will depend on the sort of business model you are running, but IF occupancy is high then you are probably talking about a gross margin of 70%+, as for similar businesses like a hotel, or a port, or a toll bridge. 

- RelievedSheff is right, you are wildly underestimating the cost of building - unless you already own the land (and are therefore already exceptionally rich) it is often twenty times or more of the annual income stream the property can produce, not five. The cost of actually building the building is not a particularly big portion of the overall cost of the project. The cost of the land will be one of biggest figures. Land (for sheep) is not that expensive, but land in cities is expensive, and land in cities that has government permission to build on is wildly expensive because government artificially restricts supply in the pursuit of various planning objectives. In fact, most of the true value uplift for a typical development project comes from getting through that planning system; building the building is just a necessary practical step to monetise that profit, you don't earn huge amounts of value doing it.

- The government will then demand a large chunk of the development for social housing of various types, as well as arbitrary cash payments of various types, under a Section 106 agreement.

- The net income from such a project is of course taxed, so that's 19%+ that goes to HMRC as well.

- Probably the biggest conceptual problem with your mental model is that projects like this are capital-intensive. The biggest cost in building them is the overall cost of capital, that pays for the land, finances the building, keeps the lights on during the the years of planning and design processes. This is not always a direct cost, but it's very real. The money used to buy the land and build the building has to come from somewhere. Some of it will be your own equity, but a majority of it will come from other sources - equity partners such as pension funds perhaps, or most significantly bank project loans.

That money needs to earn a return, and a return that's better than other competing investment opportunities. Don't forget that it still needs to earn a return for the 4-5 years the average project is stuck in planning, and another 2-3 years for construction. In addition, that money normally demands lower risk than you as a developer, so they get paid first - if the project doesn't work well, you as a developer are going bust first, not the bank (and it happens, particularly in recessions). 

If you don't account for the cost of capital, then you are basically assuming the developer is already hugely rich, and then it becomes much less hard to explain why a rich person/company is rich. You've answered your own question by the initial assumption.

So yes, huge amounts of money get paid in rent, but much of that money will actually go to pay banks (and ultimately the interest on the savings account of the population - that money comes from somewhere!) and other financial investors. Those financial investors may only be earning 3-5% on the amount of money they put in (although that number can vary widely according to circumstances, I'm not being precise here). 

https://en.wikipedia.org/wiki/Cost_of_capital

davidmcn

And then if you thought things like hotels or student accommodation provided a reliable stream of income, along comes coronavirus...

user225688

princeofpounds said:

Thanks for the detailed reply. I am also reading up on general economics at the moment, when I have the patience, so kind of related.