How to Become A Property Developer:
If an individual is ready to invest time and put in the effort required, being a property developer in the UK can prove to be very rewarding. Through continuous effort, individuals manage to purchase their own property assets which means there is no mortgage. Few of the important aspects to keep in mind for becoming a Property Developer include:
How much Money do I need to Become A Property Developer?
The first thing an individual needs to do is work on their budget. An individual should be able to answer the following questions with ease: How is he/she going to raise money for the property? How much money an individual can get together for a deposit? How big a mortgage is sustainable? Additionally, an individual will also have to work on their budget for renovation. It is imperative to have an answer to these entire questions before one decides to venture out as a Property Developer.
Having an understanding of the Local Housing Market:
It is essential to carry out a thorough research to get a grip of the local housing market – understand the market prices in the chosen area and the most viable option (residential, commercial) in the specific area. Time and effort at this stage is very worthwhile, so it is important that a person is due diligent. Performing a thorough research can make an individual save money, thereby, avoiding additional expenses.
Developing property is a common way to start one’s own business. In this article we aim to help readers understand how to earn wealth from property and become a successful property developer. While venturing into property development, it is helpful to have a plan of action based on an individual’s short-term plan or long-term goals. Short-term plan may revolve around renovating the property for swift sale, whereas long-term goals might cover capital enhancement and rental income. Here two important strategies come into play:
- Buy-to-let is a long-term strategy where an individual can build up an assortment of rental properties that will provide income in the future. Buy-to-let mortgages are comparatively informal and easy to arrange for as long as a property owner doesn’t ask for a deposit of 25% (bare minimum). It’s worth acknowledging that HM Revenue and Customs (HMRC) views income from rented properties as a salary and hence is subject to income tax. If an individual is a higher rate tax-payer, he/she may be taxed at 40% of the total earnings.
- Buy-to-sell is another strategy wherein it enables the property developer to realise a quick return on investment (ROI). The sooner an individual is able to turn around a property, the more profit he/she will make. However, the concerned person is more dependent on market conditions – social, economic, and political factors might have a negative equity. It is imperative to note that sale of property is subject to capital gains tax.
Other key points
Another key question to answer before venturing into a property development business is whether to purchase the property under a limited company or personally as a sole trader. This can be a tricky decision as there are complex tax contemplations for each. It’s advisable to seek financial advice for a Property consultant – this will depend on the property strategy and the kind of portfolio an individual wants to operate:
- Purchasing through a limited company – In contrast to buying personal property, an individual can counterbalance interest costs against property income or rental. He/she will also only pay Corporation Tax on income whereas holding a personal property could mean paying tax as high as 40%. Here, an individual can also reinvest income into other properties, thereby, decreasing the tax liability even further – tax is only charge at year-end profits
- Purchasing as a private individual – Though it is complex, however, capital gains tax is less for personal property owners, and is beneficial if an individual plans to sell property every few years (short-term strategy)
It’s helpful to have a business plan and financial forecast in place so that an individual can accurately analyse his/her return on investment. As a general rule, an individual should aim for a minimum of 30% return on investment (ROI) when buying a property to sell on (short-term strategy). This ROI helps to manage additional costs such as any renovation, resell or purchase costs. It is important to also note that in case the renovation work is widespread, the ROI percentage will also split across labour expenses, additional raw material and machinery cost – hence produce enough margin to invest in the next property.
While leasing a property, an individual needs to consider its rental yield. There are several ways to calculate this, however, an individual can divide the total amount of rent and reduce the running costs (maintenance, insurance, mortgage payments, and management fees) by the entire amount invested to acquire the property (which should include all fees). Let’s understand this with an example:
- Yield percentage = [(Monthly rental (after reducing costs) x 12) / investment] * 100
- If the monthly rental return is £1000 and the initial investment was £225,000, the calculation would be:
- (£1000 x 12) / £225,000 = 0.05
- 0.05 x 100 = 5% yield
In an ideal world, an individual should aim for a minimum rental yield of 7%. Rental incomes should surpass mortgage payments by a minimum of 25% to cover other costs such as fees and maintenance when the property is empty
Purchasing property at a competitive price is also a very important aspect. The more an individual pays for a property, the less profit he/she will earn and this is particularly pertinent while selling a property. Remember to pay as little as possible to maximise profit from the property. Key focus areas include:
- Market research – Compare prices for similar properties and also check rental values of properties competing in the area
- Consider buying at auction – Auctions offer a high probability of getting a bargain and striking an exciting bid – agree to a bid limit in advance and stick to it
- Check planning permission – If an individual is planning to add value by extending the property it is imperative to make sure the right permission is available before purchasing the property. Create a realistic renovation budget and stick to it