What are property development projects?
The purchase of property or land with the intention of adding value through improvements such as refurbishments and planning gains in order to generate a healthy profit.
Could now be the perfect time to get involved with property development?
With a current UK housing shortage and a strong demand supported by the governments help to buy schemes; large nationwide developers such as Bellway are enjoying pre-tax profits up by almost 10%. High employment, low interest rates and mortgage availability are all contributing factors to this rise in demand.
When developing a single unit property it’s important to understand the factors that create additional value. Location and size are important aspects for saleability. Research by Nationwide shows that increasing floor space through either a loft conversation or extension which adds an additional bedroom and bathroom to an existing three-bedroom, one bathroom house could add more 20% to the value.
There are many potential financial advantages to property development, however, there are also some pitfalls too so we have made this short guide to help you understand whether development is the correct type investment for you.
Pros
Potentially higher returns
One of the main advantages of property development is that there is potential for strong returns. Historically we have purchased properties at up to 30% discount to the independent RICS valuation which allows plenty of headroom for potential capital gain. Also if purchasing a property with planning permission granted for additional units it may be possible to enhance the Gross Development Value (GDV) further by amending the planning or re-applying for a more profitable scheme.
Speed
The aim of every property flipping/development deal is to complete the project in the fastest possible time and to generate a healthy profit. When an investment is bought and sold for a profit within a faster timeframe it generates a higher annualised return. When investing into one of our Buy-To-Sell deals we aim to fund, refurbish and sell each property as quickly as possible and we use 6 months as an assumption within the calculations. We believe this is an achievable goal, considering the average time it takes to sell a house across the UK is currently 65 days.
Creativity
We believe independent property developers enjoy property development not just because of the potentially very good returns but also for the ability to express their creativity on a property. First impressions are key to securing a buyer fast. In our opinion, kitchens and bathrooms are possibly the most important areas and also generally the most costly however it could be money well spent if done correctly.
Cons
The risk
The main aim of property development is to make a profit however a developer has a greater risk of potentially making a loss. There are a couple of ways in which this could happen, for example, property prices could crash so the asset would lose value. Secondly, there could be unforeseen issues and additional costs which push up the build costs.
A potential way for independent property developers to avoid this is by instructing a RICS qualified surveyor to conduct an in-depth building survey which will outline the works that need to be done in order to bring the property up to a sellable condition plus listing the costs attached to these works. Even though the survey can give you good guidance it doesn’t mean that you won’t incur any unforeseen issues such as the ground not being suitable for general footings.
Planning ahead
When completing a property development you have to be aware of the time in which it takes to sell a property and whether ultimately it will sell. The longer the property is on the market additional mortgage or financing payments will mount up, thus decreasing profit. Also the longer it takes to turn the project around, the annualised returns will also decrease. One of the most important factors to consider when developing property is allocating a percentage of the development cost as a contingency in case things go wrong so it’s good practice to allow usually between 10-15% for any unforeseen issues.
Hands on management
You also have to ask yourself whether you have the time to manage a team of building contractors and run the day to day operations or would you need to pay someone else, either the contractor or a project manager. The average project manager is paid around 10-12% of the overall project cost and even though this could save you time and costly mistakes, it could also eat a fair chunk of the profit.
Barriers to entry
Many first time developers might overlook the costs associated with purchasing and selling a property. Recent changes to stamp duty in regards to second home ownership means that when purchasing your project if you already own your own home you may face paying much more stamp duty. Prior to these new rules which were implemented from 1 April 2024 and based on the February 2017 average house price of £234,466, you would have paid £2,189 stamp duty on a second home, but today you would face a bill of £9,223 which is a massive 321% increase.
Why invest in property development projects with Property Moose?
Experience
One way to harness existing experience and knowledge within the marketplace is through becoming a part of a Property Moose development opportunity. We have years of experience and a world-class team of qualified and passionate individuals to take the hassle away.
Passive income
Investing in development deals with Property Moose may be the perfect option for you if you are after a passive ‘hands-off’ investment but with potentially strong returns. See our blog post on passive income ‘Is being a landlord worth it?’
Our unique purchasing power
Because we are a known entity we have strong buying power which enables us to complete quickly on the best deals available to us. Many people might not be unable to compete with this because they don’t have sufficient funds to purchase properties in cash of which is generally required when sourcing below market value deals.
Disclaimer and Legals
Property Moose does not provide any advice in relation to investments and you must rely on your own due diligence before investing. Please remember that property prices can go down as well as up and that all figures, rates and yields are projections only and should not be relied on. If in doubt, please seek the advice of a financial adviser. Your capital is at risk if you invest. This post has been approved as a financial promotion by Resolution Compliance Limited.
Property Moose is a trading name of Crowd Fin Limited which is an Appointed Representative of Resolution Compliance Limited which is authorised and regulated by the Financial Conduct Authority (no: 574048).
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