Buying, and then renovating, a run down property to sell on afterwards is one way to make money – but for all the big profits you hear about, remember that success needs thorough planning…
The way to make a profit out of property renovation or development is by being steely-eyed when it comes to controlling your money.
It’s important to understand that renovation projects are part of a business venture as a whole – not to be undertaken a whim.
There is no need for grand statements unless the end result gets you a higher profit on your renovated property. However, it is possible to over-economise to the detriment of the finished project so make sure you know your budget inside out.
The right property
To start with, you need to bag the ideal house to renovate. Buying a house that is in less than perfect condition gives you something to work with and is certainly a way to create a modern, attractive and saleable home without forking out to remove previous home ‘improvements’, which can be costly.
But taking on a derelict or even a tatty property can be a real challenge, even for the hardened DIY enthusiasts. In today’s market, it’s rare to find a cheap, run-down property with just superficial or cosmetic problems. Often there is something more serious that needs to be put right. This does not mean that less than perfect properties are off limits, but it is vital to enter into any deal with both eyes open – get a survey done, check it out and know exactly how much it will cost to put it right.
Managing your budget
Many fingers have been burned over budgets and the way to avoid this is by being realistic to the point of negativity about what your development will cost. This way there are no surprises.
A 20% safety net is a good guide, but some projects can easily double in cost. Watch out for ‘project creep’, where the cost goes up and up because you, the builder or the architect are adding more work. Make sure ome money, at least, is to hand as cash, as there will always be unexpected and urgent bills to pay.
Fearless honesty – as well as enthusiasm – is what you’ll need right from the word go. Take apart your day-to-day finances as well as those you have set aside for your development project, and immediately try to trim away any unnecessary expenses. Save money now as it will be needed later on. Unless you truly love property, enjoy the work, and like the people you’ll be working with then it can be exactly like any other job – a chore.
Time is of the essence
There are no short cuts when developing or renovating a property. There’s always an order that has to be followed. Permissions have to be sought, deliveries and workmen must be scheduled and then rescheduled, measurements need to be taken accurately and budgets adhered to rigidly. It’s quite a challenge to stay on top.
Let any of this slip and you might end up with a delay – and time costs money, possibly adding serious costs to the project. Human error is a common problem in property development projects, and regardless of whose fault it is, you’ll pay the price.
Decide exactly what work you want to undertake before asking
for any quotations. Write a clear specification – it need not be technical, but it should detail the work you want to carry out. Reputable builders will always want to do their best for you from the start. The JCT is an independent body that has produced a standard contract for use between you and the builder. This is a robust legal document that avoids technical and legal jargon, making it easy to understand and stick to.
It confirms the precise arrangements for the work to be done, including the price, the payment terms, working hours, insurance and guarantees plus how to resolve disputes, should they arise.
It also deals with how to make changes to the work
in progress and how to manage a builder who wants to extend the time taken for completing the work. Remember that your builder should be someone you feel completely comfortable with and you should feel that you are able to communicate well together. Try and build up a positive relationship with him.
Making a quick buck
One of the easiest ways to make a little money out of property investment is to buy a new apartment off-plan in what you believe will be a sought-after development. Off-plan purchases are how big developers maintain their cash flow and they will often offer discounts to investors in the early planning phases of a new development.
Buying off-plan means you will be getting a property at the cheapest price – assuming it is a good one – will offer. Subsequent phases will almost certainly be more expensive, and even modest appreciation should ensure you a few thousand pounds of profit when it comes to sell.
A project manager will liase with the builder and ensure work is carried out to a specification. You could manage your own project or employ an independent advisor. There is a Joint Contract Tribunal (JCT) contract you can use to formalise your relationship with your project manager or building consultant.
Always get quotes well in advance, from carpets to carpenters. That way you can calculate all your expenditure, but never expect the scheduled timescales to be met.
Know your market
Start by comparing like with like. Research should include finding out what the price difference between a well-appointed house and one that needs a lot of work in the same street is – as a rough guide.
The savings might not be that great so ask local estate agents for an indication of how much the house would be worth once it is done up, then reduce that figure by 10% to allow for the agent’s enthusiasm, and add at least 10% to the cost of any work you plan to do. This will give you a more realistic idea of the figures.
If there is still a positive difference, the house is worth considering. The maths are straightforward. A house that costs £180,000 in an area where they regularly sell for £200,000 won’t be worth touching if it is going to cost £25,000 to put it right and bring it up to scratch. Use your head and only go for a property where you’ll get a good return – otherwise it just isn’t worth your time.
Survey – or be sorry!
Never be afraid to consult the experts, because a job done well is a lot cheaper than a bodged job that has to be put right. You might start with a good chartered surveyor. Ask for recommendations to find someone who is thorough and knows about refurbishment.
A surveyor might be willing to give a property a quick check for a relatively modest fee or even visit several properties on a shortlist for a day’s fees.
Once you’ve decided to take the plunge, get a full independent structural survey. A bank or building society valuation on its own will be next to useless for this type of property.
If it’s a large project you’ll need more help – maybe even an architect. Their fees come to around 15% of the total cost of the work, but often an architect can save more than this by better use of space and materials. Employing an architect will also help to keep the project on time and budget.
If the property needs structural work, the architect might recommend a structural engineer’s services too. Arrange for builders and plumbers to quote for the job before you make an offer. Then you have an idea of how much the work will cost, and you can use this in your negotiations.
If you plan conversion work, such as changing a commercial building to properties for residential use, consult the local planners. Most planning departments will give basic advice by phone or email, and this can save serious headaches further down the line.
Talk to lenders at an early stage about the work. Most banks and building societies will cap loans for less than perfect properties, until the work is carried out. This is known as a retention and will cause cash flow problems unless you budget for it in advance.
For large-scale projects, a phased release mortgage might be the answer. In these cases the lender makes staggered payments as jobs are done, such as roofing or plastering.
Few people have the financial security to be able to simply throw in their day job, buy their first investment property and get on with improving it. The reality is a difficult and precarious task made up of balancing known demands of an old way of life and new and unexpected working demands.
Most first-time developers will have to endure the challenges of their day job as well as lunchtimes, evenings and weekends of trying to co-ordinate what might be a tricky process. Employing a project manager can deflect an awful lot of the stress of a project, but at the same time is guaranteed to cost around 10% of your budget. It’s important to weigh up the pros and cons and decide what works best for you as you start out in the property developing business.
If you decide to project manage yourself, you need to know what you are letting yourself in for. Much of your time will be spent on site or on the phone and you’ll have to make quick decisions and cope calmly with issues as they arise.
Should you reach the stage where you feel confident that this is the future for you, time will be spent planning for that – and finding the next project.
As a full time developer you will need to source and then nurture professional relationships with a wide variety of people, among them estate agents, an independent mortgage broker, a solicitor, surveyor, accountant, builders, plumbers, electricians, tenants, letting agents, and perhaps a project manager and architect. You will also need to form constructive relationships with neighbours who might be affected by your development.
While properties may throw up unexpected and unwelcome surprises, it is almost always people who will surprise the most. Suppliers may fail to deliver on time, tradesmen may leave you in the lurch, and buyers mayl back out at the last minute. A successful developer will have a contingency plan.
Have you got what it takes to be a property developer?
Money If juggling your own money is a monthly nightmare then full-time property development may not be for you. Multiple on-going projects will require separate budgets. Becoming self-employed will also mean the annual chore that is the self-assessment tax form, as well as sorting out your own National Insurance payments, health insurance and pension plan.
Satisfaction The idea is attractive and developing property brings out the show-off in some people. But what matters is your livelihood and therefore the end profit. To realise that crucial 20% profit margin you need to satisfy your target buyer’s expectations – not your own peccadilloes.
Never plump for the first mortgage that you’re offered. Research the available products yourself, but then go through your finances and your business plan with an independent financial advisor (IFA) whose services have been recommended to you. Your IFA should then be able to suggest a range of mortgages at the best possible rates, and also identify a figure that you can realistically spend on a property without you getting into serious trouble. Remember you will also have to budget for the new Home Information Packs (HIPS) from June 1 2007.
Stress However experienced you are, you can still be caught unawares by an unforeseen or overlooked circumstance.
To overcome this make sure you have allowed for every potential disaster in the initial business plan – and that includes trying to read the movement of the housing market where your project is happening.
Research For the first-timer premium properties will almost certainly be beyond your budget so look for something unusual within a desirable area that you could possibly develop as a marketable home. Better still, work out the down-at-heel places that will become the next big thing.
Locations next to property boom hotspots often benefit from reflected glory. It’s always better to try and redevelop the worst house on the best street rather than the other way round. Have in mind at all times the kind of buyer you will be targeting the refurbished property at, and the highest price that a property of that type will fetch locally.
Timing Look before you leap and trust your instincts. Keep that profit margin to the forefront of your thinking. If a property in your target has been on the market for a long time then make a low offer. The vendor may be grateful of a lifeline. Once you have bought your development property it is vital to set a budget for improvements and stick to it. Your profit margin relies on you doing the minimum that you can get away with to attract your target buyer.
Priorities There are some jobs that have to be done, come what may. Make sure they are the ones at the top of your list – things like structural work, roof repairs and rewiring are unavoidable. Potential buyers share the same characteristics – they don’t like downstairs bathrooms and bad kitchen layouts. These are the key areas that need to be resolved.
Avoid costly mistakes Managing the project yourself will save money but may ultimately prove more expensive if mistakes are made, or decisions delayed. When employing builders or tradesmen, always seek out recommendations and at least three quotes. Doing some of the work yourself will obviously save money – but make sure you are up to it and can also afford the time.
Recycling The kitchen and bathroom must look efficient, smart and clean, but do you really need to replace all the fixtures and fittings? Dressing up old kitchen unit carcasses with new doors and handles, and fitting attractive taps to existing baths and wash basins can make a massive positive impact. What’s more, these improvements needn’t cost a fortune. Check out the property’s existing features – they may be battered but they might also be redeemable. Renovation is cheaper than replacement. Keep it simple and don’t be tempted to go over your budget.
Supplies If the kitchen and bathroom are going to need replacing then consider sourcing replacements from further afield. DIY products can be bought for considerably lower prices on the continent. At the same time keep your eyes peeled for period and antique finds and visit salvage yards.
Selling up Selling the finished house needs to be considered right from the commencement of the project. And the longer it takes to sell the less you’ll profit. You can sell it yourself but an estate agent will have the expertise and the potential clients. He will, of course, charge a fee but it might well be worth it.
Tax The higher the purchase price of your renovation project, the more you will pay in stamp duty. It rises fast, so for a house costing £255,000 you will pay £5,200 in tax!
Stamp Duty is only paid by the purchaser of a property, so when you sell on your renovation project you will not have to pay the tax, although you will potentially be liable for capital gains tax on any profit if the property is not your main residence.
One way the Stamp Duty burden can be reduced is by purchasing a property in an area designated as disadvantaged by the Government. In these areas, the 1% Stamp Duty threshold is £150,000, and the rest of the thresholds remain the same.
Property is still the most reliable investment you can make and that is why so many people renovate, self-build and buy and sell. However, some people throw themselves into the project without planning it first – and that is when disaster strikes.