For anyone with capital to spare, there is no doubt that investment in property development is an option worth considering. If you know what you are doing, there is no doubt that it will beat the return from savings and most other types of investment. However, while the value of property has risen steadily in the UK over the long term, short-term investments can be more of a risk. This article considers how to become a property developer by understanding and calculating those risks.
If you know what you are doing, short-term buying and selling of property, known as flipping, can be a way of making a greater return more quickly. It is also a way that small property investors and businesses can improve outdated and unpleasant housing in their area and make it once again habitable and attractive.
Here is an example of how a short-term ‘flip’ of property works.
Once you purchase a home for £150,000, you can spend £20,000 renovating it. If you decide to sell the house for £200,000, you will make a £30,000 profit. If everything goes according to your plan, you can achieve this in two to three months. However, it is important to consider the various fees and costs involved and other variables that can affect your plans.
It is hard to know if the project is going to be profitable because of the various variables and the fees and costs involved. Do not purchase the property before you know if the work you will do on it is likely to increase the value of the property.
You must know how to pick the best properties that will sell quickly in some locations. It is hard to sell properties in some locations, so you need to purchase properties in the most desirable locations. Do your homework and key a sharp eye on trends. You can lose money on your project because of changes in the property market, hiring the wrong contractors, and miscalculations.
You need to consider the costs to know if the opportunity will be profitable
You must know the costs involved as you calculate the potential profits of property development. The costs can quickly wipe out £20,000 profit in just buying and selling prices, even after you have considered the cost of refurbishments. Here are some of the costs you need to consider:
- Stamp duty
- Broker fees for finance
- Estate Agent fees
- Legal fees
- Tax – you may decide to use a limited company to flip your property, so you will have to pay corporation tax, which is cheaper. However, it is expensive to pay income tax on individual income.
- Holding costs – the amount you will spend as you own the property, such as council tax, utilities, insurance, etc.
- Survey fees – if you want to assess the cost of refurbishing, such as plumbing and rewiring your property, then make sure the survey is detailed.
Here is the most accurate scenario based on the above example:
- The cost of purchase: £150,000
- The cost of refurbishing the property: £20,000
- The costs of buying and selling: £15,000
- Selling price: £200,000
This project is viable. However, the margins can change easily, reducing the profit of the project. In addition, if the property stays on the market for a long time, the holding cost increases and you may end reducing the selling price of your property. This can easily wipe out £10,000 from your profit.
If you have misjudged the market, you can alternatively rent the house to a tenant. Check Rentola United Kingdom to get an idea of market rental rates in the area to assess whether this could be a more profitable option.
Many experienced property developers use a bridging loan and cash to finance a house flip. You will not get a traditional mortgage for a house flip. This is because banks offer a traditional mortgage for a long-term purchase. It can even take time to get a traditional mortgage. It is much better to use a bridging loan for flipping.
Unlike a traditional mortgage, a bridging loan has a high-interest rate. It is easy to reduce the interest you will pay. How? You do not need to borrow the full amount since you can just borrow a portion of the money you need to purchase and renovate the property. Then, you use cash to finance the rest of your project.
How you can increase your property’s value before you flip it
You need to assess the value of the property before you buy it. You also need to do some research to ensure you have the knowledge, skills, and even contacts to increase the value of the property. You can even use Zoopla or Rightmove to monitor the value of similar properties.
What can you do to improve the property’s value? You can improve the driveway, lay garden decking, and improve the landscape. You can also replace soffits and fascias to immediately improve the curb appeal of the property. In addition, you can hire an expert to rewire the property and fix the plumbing if that is necessary. Updating the bathroom and kitchen can increase the value if the fittings are outdated. If possible, you can add another room by building walls. You can even convert the basement or the loft. Adding a conservatory is even better.
Do not just decorate and paint your property since they are not enough to increase the value of the property. This is what most people do once they purchase a house.
It is important to get involved in refurbishing your property. If you hire a contractor to renovate the property, do not leave the contractor to work on the property alone. You need to be there to see where you can cut costs and increase costs before you sell your house fast.
As your contractor refurbishes your property, you need to supervise everything. This is because the costs can increase quickly, especially if you are not supervising the project. If the costs increase, your potential profit will disappear quickly.
Are there rewards and risks of flipping properties?
Almost all property development transactions are risky according to London Bridge Estate Agents. However, it is even riskier if you want to flip properties. Flipping properties is very risky since you will be trying to make a profit quickly. Home improvements and renovations can be difficult to manage when activities are contingent on several contractors and things can quickly get out of control.
Once you flip a property successfully, it is almost impossible to repeat the same process. This is because properties are different, you may not have enough cash, and the market changes quickly. You can use your experience to increase the chances of successful flipping but it is not easy to create a winning formula.
It is almost impossible to make accurate financial projections. You will need to fully assess the property before you make financial projections. A lot of things can affect your financial projects, including property staying on the market for a long time, tax problems, and building delays. All these increase your holding costs. You may have to reduce the selling price to sell the property.
If you fail to sell your property, you can end up with the financial burden of the property and the mortgage of the house you are living in. This can ruin you financially. It can even negatively impact your future plans. Unfortunately, it can also affect your health and wellbeing.
However, if you calculate the risks effectively and sell the property quickly, you will see rewards. You will have a much-improved return on investment and someone will have the home of their dreams, remodelled to perfection and ready to live in right away.