5 Ways To Get Into UK Property Finance For The First Time
There are now over 2.5 million property investors in the UK, as more and more people consider property development as an affordable and dependable short- or long-term investment for their future.
Unlike more intangible investment products (unit trusts, foreign exchange dealing, futures trading…) most of us have experience of property ownership. The opportunities are clear to see, and we can understand the value of our own personal input.
With profitable experience of buying and selling our own homes, we may have a good sense of how to make money from property and feel ready to apply our judgement on a wider scale.
Property development and buy-to-lets have proved to be reliably profitable for the past 20 years. And while some developers have built up substantial-enough portfolios to be significant local and regional players, everyone starts with their first speculative purchase.
What is property "development"?
With straightforward property investment you profit solely from the increase in value of the property, plus any rental income earned along the way.
Property development involves the investment of additional capital to alter and improve a property and project it into a new market sector.
Advantages for investors
- With property development, you firstly benefit from capital appreciation – the value of your property holdings rising over time.
- Secondly, if you choose to hold onto a property after you've made improvements, and rent it out, you benefit from a regular income from tenants.
Here we’re looking at the five most popular types of property development investment that we assist our clients with.
1 Buying residential property to renovate, and sell on or let out
Purchasing residential property which is run-down and in need of modernisation, or which can be profitably extended or sub-divided, can deliver worthwhile capital gains.
To transition from profitable home ownership to profitable property development you need to consciously make all renovations decisions with your head rather than your heart.
From where to buy, to how much you spend on fixtures and fittings: be driven not by what you would choose, but by the most affordable option that most people would choose.
Sell on or let out?
The key issue is to be very clear at the outset about the aim of your renovation, as this should direct all your design and fit-out decisions. (For a rental property: hard-wearing flooring, and easily-repairable, standard fittings.)
Take advice, and be extremely selective about the one or two stand-out features you choose to spend money on to draw potential buyers or renters over the threshold.
If your tradespeople look impressed and say 'I’ve never installed one of these before' you’re probably overspending on fittings.
Yes, if the property fails to sell at the price you want, you do always have the option to rent out until the market recovers.
But you would have made different spending decisions at the outset. And there will be "refresh and repair” costs at the end of the tenancy. Plus tenanted (or newly-vacated) properties are often a harder sell.
What price to buy at
- The advice "Buy the worst house in the best street" still holds true. But be prepared to walk away if prices are already too high for you to be able to take a reasonable profit over your projected time-period.
- In rising markets, unrenovated properties often sell for close to the cost of fully renovated homes: owner-buyers like to "put their own stamp" on a home.
- Look for the next up-and-coming area, on the borders of the suburb or streets already in high demand.
- For a rental property, apartment or smaller home, focus on suburbs which may be less attractive but have good transport links, or are close to major employment hubs.
How much to spend on renovations
- As a rule of thumb, the costs of a cosmetic renovation should add up to no more than 10% of the purchase cost.
- In general, you will not recoup the cost of unseen structural work such as damp-proofing or a new roof.
- If a pre-purchase survey shows that structural work will be necessary, get it paid for by the vendor with a reduction on your purchase price. Or be prepared to walk away.
- Be rigorous about taking into account all costs when calculating your profit margin, including professional fees, the cost of servicing a loan, and the opportunity-cost of your own time.
Selling-on a renovated property
In all your finance, purchase and renovation decisions, be mindful of a property’s “ceiling value”: the highest amount it could be sold for on the open market.
When buying, you may be bidding against builder-developers who will be doing their own renovations and able to keep costs down in that way. Overspending on renovation costs can reduce or wipe out your profit.
Letting out the property
If you choose to let out your residential property, there are two main tenancy options you can choose from. You will need to be clear who your target occupants are, and what your projected income stream will be, before you plan renovation work.
1 Single tenancy letting
This is the most popular choice among investors. One “householder” tenant – a couple, a family, or a settled group of sharers – pays the whole rent every month and their utility bills.
- Management is straightforward
- You may attract a good, long-term tenant
- Single tenancies are often responsible neighbours and take care of the property
- You lose money on “void” periods between tenancies
2 House of Multiple Occupancy (HMO) letting
Individual rooms in a house are let out to three or more people (or five or more for a Large HMO), sharing kitchen / living room / bathrooms and other facilities.
Initial fit-out costs may be more costly (multiple kitchens / bathrooms) and regulation requirements are more rigorous, but the increased rental returns are considerable.
- Management can be more costly and time-consuming
- Usually faster turnover of short-term tenants
- Utility bills usually included in rent
- Additional bedrooms, above three, significantly improve profitability
- Multiple tenants cover the cost of individual tenant voids
Finance for renovation projects
For a cosmetic renovation you will be looking for light refurb finance.
For a major renovation on a property that doesn’t currently have a working kitchen or bathroom, or which requires structural work, you will need a bridging loan to fund the project until it is at a mortageable stage, or heavy refurb finance.
You will be wise to look beyond high-street banks for funding for renovations projects: in general they’re not set up to finance this type of project, and you could pay a higher rate of interest without the finance flexibility a specialist lender can provide.
Many lenders will only consider HMO lending to experienced landlord-developers, so you may find it useful to start with a straightforward buy-to-let or renovate-to-let to build up a track record.
2 Building a second home on your property
If you have the space available (a larger-than-average garden), you may have a valuable opportunity to build an additional property on your own land.
Talk to your local planning authority about planning requirements.
- Save up to £100,000 on the cost of purchasing a separate building plot
- Save on utility connection costs, accessing from your property
- Take legal advice about any covenants on your property
- Check with estate agents about any impact on the value of your current home
A ground-up building project like this can be funded by new-build development finance.
3 Demolish and rebuild
If you’re ready to have go at a ground-up building project, but don’t own land large-enough to subdivide, an alternative is to find a dilapidated, or derelict, house and rebuild it.
- Demolition costs £5-10K
- Services are already on-site = a significant saving on build costs
- If all walls are demolished to ground level the rebuild is VAT-free
We bought a three-bed 1950s bungalow which had been owned by an elderly lady who went into care. It needed to be completely gutted to renovate it. Every architect recommended demo and rebuild, and we met quite a few renovators who said, with hindsight, 'I should have knocked down and started from scratch.'
Development funding for a project which requires demolition of an asset with value requires that a lender will be reassured that you're sharing the mid-project risks. You will probably need to offer a greater capital injection for lower loan-to-value (LTV) funding.
4 Buy land to get planning permission to sell on
You’ve heard the stories: farmer sells a field with planning permission to a developer, and retires to the Caribbean on the profits.
- Planning permission increases the value of land by a factor of 50x to 100x
- UK agricultural land is typically valued at around £7,000 per hectare (prices dependent on proximity to road access, houses and services).
The reality is that the profits to be made on development land are so significant that there are very few undiscovered parcels of land remaining which are likely to be granted planning permission. You will need to work hard to find them, and take risks in investing.
New property developments can be contentious and subject to the vagaries of local politics and changes in planning law: you need to be prepared to take risks and stick your neck out.
Can I apply for planning permission on land I don’t own yet?
You can start the process of applying for planning permission on land before you buy it (or you can appoint an architect, solicitor or builder to do this for you).
But people who have an interest in the land (or buildings) will be informed about a planning application:
- The owner, or all the part-owners
- Any leaseholders with at least seven years remaining on their lease
- Any agricultural tenants
So if the landowner hadn’t previously thought there could be development value in their land, they will now! And if you haven’t consulted with the landowner before submitting the application, you will almost certainly have alienated them.
It is possible to purchase land on an option contract, subject to planning permission being granted. You will usually have to pay a non-refundable deposit to the owner, which you will need to be prepared to lose if you decide not to go ahead with the sale.
Costs of planning consultants
Before buying, set up a meeting with the local planning authority to get a good understanding of their view.
And invest in a consultation with a recommended planning consultant: a good gamekeeper-turned-poacher will be able to find loopholes you’re unaware of, and negotiate the system to your advantage.
If you decide to go ahead, be prepared to pay some good money to set them to work on your behalf.
There ARE opportunities for the first-time land developer…
Interestingly, the advantages are not all to investors with the deepest pockets. Prospective developers who live in an area with adjoining undeveloped land can steal a march on outside buyers and overcome the traditional hostility to development:
- You have inside knowledge of land availability and possible plots for sale
- You can agree plans and potential profit-share with the original land owners
- You won’t object if your property most closely overlooks a development site
- You’re well-placed to win round local opponents
Funding for speculative land purchase may be a land loan, or development finance.
5 Converting commercial property to residential
Despite the chronic housing shortage, Britain’s towns and cities still have under-tenanted and disused office blocks, factories, garages and retail spaces which local authorities look favourably upon for conversion to residential premises.
A few schemes converting inner-city office blocks to apartments have a acquired a poor reputation for quality, and occupancy management. (You can’t improve on office ceiling heights and window styles, and the structures may not allow for solidly soundproofed internal walls.)
But many warehouses and Victorian factories offer solid build and generous proportions that give scope for very imaginative and profitable upmarket conversions.
Economies of scale (increasing the number of converted units for sale) favour larger and more experienced developers. But there are opportunities for smaller, first-time developers who have strong business experience in another field, partnering with experienced builders, developers or architects.
In particular, developer-investors with a background in branding and marketing have valuable experience to bring to branded rental developments for students or young professionals modelled on the WeWork “co-working” office rental spaces.
Staged draw-down development finance from specialist lenders will give you the agreed funds you need as-and-when you need them, so you’re not paying interest on money until you need it.
Property development arranged by Clifton Private Finance
With offices in Bristol and London, Clifton Private Finance has expertise in sourcing and securing finance facilities for investors interested in pursuing any of the property development investment options we’ve detailed.
We have experience of a wide range of developments and work with all the leading banks, private lenders, and specialist institutions in the UK, to give you access to the most suitable funding for your project.
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