A Beginner’s Guide To Property Development
Property development has grown massively over the last couple of decades. Although the industry suffered in the years following the credit crunch, many people are once again looking to start their own property development business as the recovery takes hold.
Some people go into property development part time to supplement their main income. Others take it up full time and look to build a portfolio of properties or grow a buying and selling venture. Either way, you need to have a clear idea of what you want to achieve in terms of profit and income, and how you intend to fund your business. If you don’t plan thoroughly and stick to your budgets, you could easily find yourself losing money instead of making it.
There are two main strategies in property development. Some developers buy to sell. Of course, the idea is to buy low and sell high – you purchase a property and make improvements to increase its value, then sell it on for a profit. You need to factor in the money required to make the necessary changes, however. It’s a fine balance and takes shrewd judgement to work out which improvements to make. If you spend too much or focus on changes that won’t significantly increase the value of the property, you’ll reduce the profit you make.
Property developers using the buy-to-sell strategy usually reinvest much of the money they make by repeating the process and scaling up their purchases and profit.
A buy-to-sell strategy works best when the market is rising. During property booms, by purchasing a property in the right area it’s possible to make a profit in a relatively short space of time without even making significant improvements. However, sales are liable for capital gains tax.
Buy to let is the preferred option for many. It’s more of a long-term investment that allows you to retain your asset while also getting a regular income from it. Some part-time developers buy one property with the help of a buy-to-let mortgage and then use the money they get from letting it out to supplement their salary from their main job. Others look to build a larger enterprise by reinvesting the money they make and also borrowing against their assets to build an expanding property portfolio.
Buying to let can also involve making improvements to the property in order to increase the amount of rental income you can get.
The rental yield is an essential consideration in a buy-to-let strategy. It represents the annual rental income expressed as a percentage of the property. It’s calculated by dividing the annual rental income by the property’s capital value, and then multiplying the figure by 100. You can use this calculation to help you decide if a property represents a good investment. But don’t forget to take your mortgage payments into consideration when working out how much money you’ll make.
There are other factors to consider. For example, will you be using a lettings agent? If so, their fees will also have to be taken into account, along with any other expenses such as maintenance and service costs.
Whichever strategy you choose, you need to thoroughly research both property and area before making your purchase. Look closely at the market and how it’s likely to develop in the near future. Buying at the wrong time can be disastrous.
You also need to research financing options. There are many mortgage providers out there, so shop around and get the best deal available.