5 Ways To Get Into UK Property Development For The First Time

11-June-2019
11-June-2019 17:14
in General
by Jennifer Stevenson

Property development and buy-to-let have proven to be profitable investments for the past 20 years. There are now over 2.5 million property investors in the UK.

The easier access to finance for developers is expected to continue to push up prices in most parts of the country. Even with government commitments to housebuilding programmes in the next decade, demand from would-be homeowners and property investors seems likely to outstrip even enhanced supply for some time yet.

The appeal of tangible bricks-and mortar is obvious for first-time developers: the demand for homes, in particular, will always increase, and property development offers two distinct advantages to investors:

  • Capital appreciation: the value of your property holdings rises over time. You can sell your properties individually or as a whole at a later point and realise a substantial capital gain – this is a long-term strategy.
  • Income generation: if you choose to hold onto your property and rent it out, you gain a steady income from tenants.

Here, we're looking at the five most popular types of property development investment that we help our clients with.

1. Buying residential property to renovate and let out or sell

If planned and executed correctly, purchasing residential property which is run-down or in need of modernisation with the purpose of renovation can lead to an appreciable gain in the value of the property and its desirability for potential purchasers or tenants.

A typical renovation project can involve substantial repairs to the property to bring it up to modern standards, changes to the internal layout, replacements or upgrades to fixtures and fittings, and the improvement of external areas.

The capital gain in buying residential property to renovate comes from finding a home or apartment where the price you to pay purchase and renovate the property is substantially less than the price you can realistically expect to achieve when you take the fully-renovated property to the market.

The profit is usually to be made on the purchase price: being the first to identify an opportunity, bargaining hard (and being prepared to walk away), and closing a deal with the vendor before other potential buyers bid you up.

Development-finance-for-building-project

KEY POINT FOR FIRST-TIME DEVELOPERS: Be very clear on you intended purpose at the outset. You can either realise your capital gain straight away by putting the property on the market, or delay capital gain by finding tenants to provide a rental income.

But the style and standard of renovation you do for sale or for rental will be very different.

Letting out the property

If you choose to let out your property, there are two main ways of doing it:

  • Letting it out to a single tenant or family: This is the most popular choice for first-time investors: your monthly income pays for your buy to let mortgage and your other management and maintenance costs, with some profit on top for you.  One contract, one tenant to manage, low management costs and a good chance they will stay long-term.
  • House of Multiple Occupancy (HMO): Letting out individual rooms in a house, with the living room, bathroom, and kitchen shared by the occupants. A Large HMO rented to five or more individual tenants offers considerably greater monthly rental returns. But with higher management and maintenance costs. with five rooms in it, you could derive five separate sources of income from the one property.

Letting out the whole property to a single tenant can return a reliable monthly rental income, but there’s more risk attached to void periods when the property is empty and you’re receiving no income – which can wipe out your annual profitability.

With an HMO, even if the house is not fully occupied you will continue to receive rental income, but arranging necessary repairs and upgrading can be more complicated.  

Rental-property-renovation

Selling the renovated property

If you choose to sell, you need to make ensure that the price you achieve pays for the purchase, the full cost of renovations, the cost of finance, your time, and the opportunity cost of that capital.

Every property has a "ceiling value": the highest amount that the property can be sold for on the open market. Even the most high-end fittings and finishes will not achieve a price above this ceiling, and first-time investors in particular need to rein back on the cost of renovations.

The most successful strategy is, as ever, to buy the worst house on the best street. The greatest potential gains are to be made with successful renovations in popular residential areas, but you will be competing on purchase price against potential doer-upper owner occupiers, and builder-developers.

If you’re looking for funding for a property renovation, we suggest that you stay away from high street banks. They’re not set up to finance this type of project: you’re likely to be charged significantly higher interest rates than can be found elsewhere, and you won’t enjoy the flexibility that specialist lenders provide.

2. Buying commercial property to convert to residential property

Commercial property is any kind of building that is being used, or has been used, for business purposes: anything from office spaces to factories.

Commercial property conversions generally offer investors the opportunity to create a much larger number of residential properties because of the sizes of the buildings involved.An old factory purchased for £1,250,000 could potentially be converted to 10 residential apartments valued at £300,000 each.

The larger the number of units created, the better chance you have of generating a substantial profit from a conversion - if the property is in a popular or up-and-coming area in demand from buyers or renters. Look for opportunities in city centres to create build-to-rent or student accommodation from unused office or warehouse property.

Development-finance-structural-renovation

Conversions of commercial property to residential use, particularly when the property has lain idle for a while, have been popular with both central and local government, and are currently (in 2019) less likely to face planning permission obstacles than other types of conversion.

3. Building a second home on your property

If you have the space available, you may be able to build an additional property on your own land.

If you have a larger than average garden (as a rule of thumb: roughly three times the size of your home), building another property in it should not have a significant adverse effect on the value of your existing home.

You may be able to avoid some of the costs when connecting the second property to services: utility companies won’t need to dig up roads for access to water and gas pipes.

If you can secure planning permission in your own garden, you can save up to £100,000 or more on the price of purchasing land - money that you can spend on the development.

Take advice from an experienced property solicitor about any existing covenants on your existing property before embarking on any project.

Finance-for-ground-up-development

4. Buying land to do a ground-up development

Land that has already been granted planning permission is more expensive than land without it. But it will often be worth the increased price compared with the risk of buying land without planning permission.

Planning a ground-up building project can be a considerable undertaking, and build time has a significant impact on the cost of your finance.

If you have little or no experience of construction project management, an experienced project manager who coordinates contractors and the build timeline from start to finish will pay for their own fees in cost savings and managing budget overruns.

A property finance facility will help you to buy the land and to pay for construction costs, but you will need to have "skin in the game" cash or your own to invest. These are complex finance arrangements and the best way to obtain the most appropriate funding for your project is to engage a private finance specialist.

5. Buying land to get planning permission to sell to a developer

This is a bold strategy that offers potentially high returns for considerable risk.

Its success depends on local knowledge and being able to spot a potential opportunity and persuade a landowner to sell, a thorough understanding of the planning process, and an ability to hang on and take your (considerable) potential profit later rather than sooner.

You can make enquiries about potential planning consent before you purchase land, but the owner will be notified of this. Once you’ve acquired a parcel of land, the process of obtaining planning permission can take many months, and even years, during which time you will be paying for the finance on your purchase (or the opportunity cost of that capital).

Local authorities’ willingness to grant planning permission varies across the country and is strongly influenced by local politics, local and regional plans and agreed development priorities.

The potentially significant capital gains to be made are driven by developers continually seeking to build up their "land bank" of sites with planning permission they can build on in the future.


Flipping Property?

Buying, Renovating & Selling (or Letting)

Finance Rates from

0.44% pm

1 - 18 months

Rates up to 80% LTV

As at 21st June 2019

Ground Up Development

New Builds

Finance Rates from

0.335% pm

Up to 30 months

Rates up to 70% of GDV

As at 21st June 2019

Existing Development?

Refinance & Exit Finance

Finance Rates from

0.335% pm

1 to 18 months

Rates up to 75% LTV

As at 21st June 2019

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Property Development with Clifton Private Finance

Clifton Private Finance has wide experience in sourcing and securing finance facilities for investors interested in pursuing a vierty of property development strategies. We work with leading banks, private lenders, and specialist institutions across the finance market in the UK to arrange the most affordable and flexible finance for your project. Call us on:

0203 900 3040

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