By Ian Child, propertyCEO and author of ‘Your Own Personal Time Machine, a guide to getting your life back’
For some time now the shine has come off the buy-to-let model for making money, and many landlords are looking at different ways to make a profit. But you don’t need to be a landlord to dream of making some serious money quickly and easily? But how do you go about it? And how do you keep risk, effort, and the time it takes to accumulate the cash as low as possible?
Defining our terms
First thing to look at is “serious money”. The average gross salary in the UK currently stands at around £35,000 (around £27,500 after tax, etc.), so I suggest our target should be £200,000 – a tidy sum for most people. As we don’t want to wait decades to pocket the cash, let’s go with a timescale of two years – it’s reasonably short-term but still gives us enough time to do whatever we need to generate £200,000. And as for ‘easy’, we’ll assume we’re not starting with millions in the bank to invest, but instead a modest amount of seed capital of between £10,000 and £20,000 – within reach for a significant chunk of the population. We also need to consider the amount of work to be put in. With most people already having a full-time job—and not wanting a second one—we’re looking for something that can be done in spare time.
Of all the money-making enterprises I’ve come across, in my view, the one that best fits the bill is something known as ‘small-scale property development’, which involves taking a small commercial building of some description and converting it into residential flats. Perhaps the most straightforward example is putting flats above a shop – it doesn’t need to be any more complicated than that. And, just to be clear, flipping a house or a doer-upper is NOT small-scale development; I’m talking about the next level up. Although, if you’ve done a flip or you’re an existing landlord, small-scale development should definitely be on your radar.
Why does small-scale property development tick so many boxes?
Let’s start by looking at the sort of money you could make. The niche we’re looking at will typically involve building between 5 and 20 units, and you’ll be targeting a 20% margin on the total gross development value (GDV) of the units you’ll be selling, i.e. their combined selling price. The GDV amount will vary based on what and where you build. However, you would typically expect this to generate a profit of between £100k and £500k. So, to achieve our ‘serious money’ target of £200k, we need to find a project that produces a GDV of £1m. How many flats does this mean we’ll need to build? The average flat price in the UK is around £200k, which would mean building five flats, although it clearly depends on what we build and where we build it. But we’re certainly not talking dozens.
The next criterion is speed. Could we bank the cash from one of these projects from start to finish in less than 24 months? On paper, this shouldn’t be a problem. It will take you around three months to purchase the building, and because most commercial buildings have permitted development rights, you don’t need to apply for full planning permission to change the use from commercial to residential. You simply apply to the council for prior approval, and they must respond within eight weeks; otherwise, approval is automatically granted. You will also need to apply for planning permission if you’re changing the building’s exterior elevations however this is not usually contentious. Because you’re dealing with an existing building, you’re not having to build anything from scratch. Not only is the structure already there, so are all the services, such as gas, electricity, water and drainage. You’re simply altering the building to reflect its new use. Let’s say we allowed a further three months following purchase to get everything in place and then nine months to physically do the work. Add on another three months at the end to sell your finished flats, and you’re looking at an 18-month timeline, comfortably within our 24-month criteria.
Now, let’s turn to effort. You’re probably thinking, ‘I’ve never developed property before, so how on earth could I do it – it sounds like a lot of work’. And it is. The thing is, most of it isn’t YOUR work. Property development must be among the most highly leveraged industries in the world. As a developer, you don’t do a great deal. You have to find a project, source the finance and then assemble a team of professionals who will build it. But all of the physical construction work is done by other people. Contractors, architects, planning consultants, structural engineers – there’s a long list. But their job is building homes and they’ve already got tons of experience. All you need to do is hire them. And the best part is that you also get to hire an experienced project manager to oversee the project. You don’t even need to visit the site if you don’t want to. You could just get handed the keys when it’s finished. However, I would advocate visiting once a month to monitor progress. Your project manager will be your eyes and ears on the ground, ensuring everything goes according to plan, and will keep you updated as things progress.
Initial investment
Small-scale development is relatively quick, makes serious money and can be done in your spare time. But surely, you’ll need lots of cash to invest in the first place? Arguably, this is property development’s biggest secret. Yes, you do need lots of money. But very little of it needs to be your own.
Here’s an example to explain.
Let’s say we want to buy a shop for £400,000 that we plan to spend a further £400,000 to create some nice flats on the upper floors. We’d then sell these flats and the shop for £1,000,000, making a £200,000 overall profit. To buy the shop, we would borrow up to 70% of the £400,000 we need from a commercial lender (there’s a ready market of specialist lenders out there who lend to developers). But a 30% deposit is £120,000, which is way above the £10-20,000 seed capital level requirement we set ourselves at the start. But here’s the thing: you don’t need to fund the entire deposit yourself. Many commercial lenders will allow you to borrow the bulk of your deposit from other people—private investors—to whom you’ll pay interest, typically around a healthy 10% per annum.
In most cases, the lender will insist that you personally have some skin in the game, so you won’t be able to borrow all of the deposit. You may need to put in 10% of the deposit yourself – which in our example would be £12,000. We’re now comfortably below our seed capital threshold. So, we now own the shop, but what about the additional £400,000 we need to develop it? Well, the same commercial lender will lend you 100% of that money. That’s right, you don’t need to fund any of the development finance yourself. And that £400,000 development funding covers not only the main costs such as materials, labour, and professional fees, it also covers the cost of the finance itself, including the interest.
Which means, using our example, we managed to turn £12,000 into £212,000 in less than two years, which is rather impressive.
Now, I’ll be the first to tell you that property development isn’t without risk, and finding a good deal takes time and effort. But have you seen how many empty shops and commercial properties are out there? The countryside charity CPRE estimates that there’s enough empty brownfield land to build 1.2million new homes, and that number is growing each year. And if you know what to look for AND you get yourself educated, you’ll be a long way ahead of the ‘give-it-a-go’ brigade.
It’s no surprise, then, that an increasing number of landlords and other investors are turning to small-scale property development. The numbers make a lot of sense, and the government is also actively encouraging development.
ABOUT THE AUTHOR
Ian Child is a former corporate leader, co-founder of the training company propertyCEO (propertyceo.co.uk) and the author of ‘Your Own Personal Time Machine, a guide to getting your life back’. propertyCEO is passionate about tackling the lack of housing in the UK and helping ordinary people to be part of the solution. To discover how you can get into property development, visit www.propertyceo.co.uk
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