Pitfalls
The old adage tells us that no investment is as safe as bricks and mortar; but recent history has proven the folly of this notion. Property development is clearly as vulnerable to fluctuation and wider economic change as any other industry.
And unlike other businesses, in property development when things take a turn for the worse, there are very few ways to cut costs or reduce overheads. When times are hard you could be left with a house you cannot shift, fast decreasing in value.
Tracy Kellett of BDI Home Finders, a firm which provides advice to property buyers, says that it’s important to look at the rental yield of a property in case you have trouble selling. “In the current market, anything above 5% rental yield is OK. To work out this figure divide the annual rental divided by the purchase price,” says Kellet. “If you are a cautious investor, go for the best quality property you can afford in the best possible area. You will not lose out in the long term.”
Another major downfall with becoming a developer is that you need money, and lots of it. House prices may have fallen slightly recently, but the average UK home still costs well over £200,000. So unless you plan on investing a lot of time renovating a really run down property, a source of finance is a must. And because of such high prices, until you make your first sale it’s often impossible to grow or expand.
During the early stages of your property development career, you’ll have to be patient as the funds build in your coffers. You’ll also have to be resourceful, by shopping around, and utilising specialist sites such as 85percent.co.uk, mortgagesforbusiness.co.uk and ebslfinance.co.uk, you may be able to secure a crucial source of finance to get your venture off the ground.
You also have to pay close attention to stamp duty when buying property. Any residential property costing more than £125,000 is subject to the tax, unless you’re a first-time buyer. You will be charged 1% of the total value of the property for values between £125,000-250,000, 3% for £250,000-500,000 and 4% for anything over £500,000.
It’s clear that becoming a property developer has the potential to lead to significant rewards, and with the right research and some level-headed judgement you could have the right foundations to build a strong business venture. But remember, in property development timing plays a huge part, and you need to be able to judge whether now is the right time for you.