I Am A Property Developer – Ask Me Anything!

Hello Peter,

I can't really comment without a floorplan, some photos, and some idea of which way the floor joists run. Assuming you are just remodelling the internal space and not changing the curtilage of the building, there shouldn't be any need to get Planning involved. However, what is going to be done with the space created downstairs by the removal of the staircase? It's unclear whom that will belong to, or how this project will affect your neighbour downstairs.

You really need to get a builder in to look at the practicalities and how you would access and use the space. You also need to ask about issues like Party Wall Agreements with your neighbours downstairs, if the removal of the staircase affects them, and Building Regulations as regards ensuring the new floor area is safely supported and insulated. There's likely to be structural work involved in creating a new floor, simply to hold it up: I doubt new joists can simply be added to the existing ones and cantilivered over the void that will be created by removing the staircase.

Regards

Tony

Reply to the comment left by "Tony Atkins" at "24/03/2016 - 15:29":

Hi Tony,

I see your point, without much more detail/photos it will be hard for you to give me advice. Not sure if this helps and I suspect it wont but the maisonette is a semi detached property and my sole entrance being to the side and not the front as the other maisonete below enters from the front of the property. My kitchen is very small and at the rear of the kitchen has steps to go downstairs and out into my section of the garden and then out to the side of the property where my front door entrance is, (the semi detached part). This side entrance is for my sole use as are the stairs and part into the garden. So what I plan to do is to leave the staircase in and just have the extended kitchen floor at the top part of the staircase entrance so hence obviously leaving the staircase defunct as it would not allow you to enter the kitchen as that now would be kitchen floor space. And obviously now the kitchen would not allow you to enter the staircase as the kitchen has been extended into the area of the entrance to the staircase. So basically if you tried to enter the kitchen from the garden you would walk up the staircase to find a celing and that is it, the ceiling being the extended part of the kitchen floor space above. So now rather than having two entrances/exits into the property, I would just have one from my main sole entrance from the semi detached section. If you can guide a little it would be great but if your advice still stands as you desribed I understand and appreciate your help with this.

Many thanks

Hi Peter, Sorry, your written description isn't helpful. I need plans and photos. But really, your query is a building-related one, not a development one. You need to show a builder round the site, and he will be able to advise on any planning issues. Regards, Tony

Ok Tony, fair enough. Many thanks.

Hi Tony,

I was hoping you (or any other property developers out there) could give me some advice. I'll try keep it brief.

I have become redundant in my chosen industry and have been unemployed for more than 6 months now. As a result, I have reached a crossroads in my career and life. I am considering plan B - a move into property development. I own 2 flats in London that are tenanted. On the sale of these flats I will raise 850,000 pounds in capital.

Why property development.

1. I am very interested in building design, construction, interiors, managing a build etc. I find the thought of constructing something tangible quite exciting. I can focus on something I am passionate about. This also gives me an opportunity to work for myself rather than a large organisation.
2. I still have 20 years till retirement age which gives me time to gain experience and build a business. Property development is also something that can be continued post retirement age. So I believe I still have time for a new career.

My proposed strategy.

To start off conservatively and gain experience. As I am unfamiliar with planning, I would initially buy plots that already have planning permission (small size plots for 1 or 2 houses and take it from there). After gaining experience I would then consider buying plots without planning. I would aim to project manage the build using various sub-contractors. I would build up a list of reliable tradesmen for future developments. I am currently reading up on building and project management to gain as much knowledge as possible (the only prior experience I have is the renovation and extension on a terraced London home using subcontractors). I would use my capital and hope to arrange additional finance to cover the cost shortfall. I have scanned internet websites for plots for sale and believe that they are available. Understandably, I would need to do my cost and profit calculations first before making any purchase.

My concerns over profitability and risks.

I understand that the industry has its challenges, those specific to individual projects and those relating to the industry as a whole, such as the rising economic uncertainty, land availability, rising building costs, low income growth, CIL costs, affordable housing etc.
1. Is it reasonable to achieve 15-20% profit on cost outlay (land, building, CIL and finance costs) on small housing developments with GDVs between 1 and 3 million pounds? Is the industry at this level far tougher than I think it is and profits more marginal? I live in the South East with CIL charges between 90 and 180 per M2.
2. Obtaining development finance - will this be possible being a first time developer? Would it be more easily available with a low loan to GDV of say 40% (considering my capital input)?
3. With the capital I have to start with, am I being too optimistic if I aimed for a 5 year target of being able to undertake developments with a GDV of 3m?

I suppose I am trying to gain knowledge and confidence that I can take the leap, earn a comfortable living and grow a business over time, thereby putting my former career to rest without any regrets.

It would be much appreciated if based on your experience, or those of your colleagues, you could give me some advice and assist me with my questions above.

Thanking you in advance.

Best regards

David,

You appear to have read quite widely and have a relatively good understanding of what you are thinking of getting into. You have a good slug of capital and it makes some sense to start with small sites that already have planning permission, rather than risk burying your capital in a site without planning.

However, this also means that your energies will be taken up with project-managing building sites from Day One, so you will not be gaining experience in planning or design issues and all the pre-construction issues faced by developers. I suppose it depends on your past experience and where you see your strengths lying: if you see yourself mainly as a build project manager, then you are effectively acting as a builder who buys-in the bulk of his labour force; if however you see yourself as more of a designer, planner and deal-maker, with more of an oversight role on-site during the construction phase, then you may wish to consider hiring a site manager or a contractor to manage the full build, while you devote more of your time to finding sites. Of course the balance between these two roles can change: you may alternate between the planning role and the project management role from year to year as sites are identified, acquired, and taken through construction, and you may decide over time to focus more on the site acquisition and planning side of things because you have a good build team around you, or vice-versa.

In either event, I think you would benefit from seeking plenty of assistance at this early stage. Perhaps for your first build or two, you could hire a project manager and work with and shadow him or her, to see what they do and benefit from their expertise. I've worked with a project manager who came from a quantity surveying background, and he was very useful in identifying good suppliers and appropriate pricing, and dealing with the the little details regarding building regulations that the subcontractors missed or that fell "between" the trades and could easily be missed, potentially fouling up your schedule.

Also, do not under-estimate the need for a really good site manager: if you are using subbies, there are countless issues that fall between the cracks and they don't want to deal with - cleaning and waste disposal, for example, or arranging utility supplies (on-site and for the end-user), accepting deliveries, storing materials safely, and dealing with the neighbours. If you are prepared to do all this, fine, but it is hard work and can take up a lot of time on muddy building sites, in all weathers and from early until late. If you can find a good independent site manager or a builder to open up and close the site each day and deal with the inevitable problems, this will free you up to project-manage and the other elements of your developer role.

You could also look to work closely with a planning consultant and architect in the "sourcing" stage of the business and in the pre-construction phase when decisions are being made about construction method and the preparation of the construction drawings.

You should also consider carefully which building warranty provider to use: I much prefer Premier Guarantee to, say, NHBC, because their inspectors seem to be much more clued up to the issues faced by small builder-developers, and are prepared to advise on up-coming stages, not just inspect and issue a pass or fail. Their inspectors are also trained to double-up as the warranty valuers, so you don't get two sets of inspections as you do with NHBC. You might also consider hiring an independent building control officer, rather than use the local council service, as again they have a reputation for being proactive and advisory, not just box-tickers.

To answer your specific questions:

1. 15-20% gross profits is achievable, and indeed 17.5-20% will be absolutely required by development lenders, so for some sites there's barely any point looking further at them if you can't achieve the magic 20% figure - unless you can afford to buy and build for cash that is, and are prepared to take a view on accepting a lower margin. Life is tougher with small firms, and in my experience the larger the site, the less competition to buy it in the first place, and the lower the costs, due to economies of scale. After getting a couple of sites under your belt, you may want to explore the option of teaming up with other developers or builders or architects, to pool your capital, share your different expertise, and build a larger limited company together. Zone Developments, for example, started as a collaboration between an architect and a builder; they then joined forces with a semi-retired former bank manager who agreed to be the MD and run the business and finance side of things (and invest some of his own capital), and the three of them have gone from strength to strength.

2. There is no reason why you couldn't get a development loan from a bank, especially with £850K of your money to play with. Obviously the lower the size of the loan, the more likely you are to secure one: 40% GDV is sensible. Have a look at some of the "challenger" banks like Aldermore as well as the big banks; your personal bank will be a good start, but you may find other big banks surprisingly reluctant to get involved: they are very risk-averse.

3. Your £3 million figure is not unreasonable, but it all depends on you finding viable sites: that is the hardest issue, and then delivering the completed houses on budget and on time, which you should get better at with time.

You don't say anything about how you plan to structure your activities, but despite the recent heavy increase in the taxation of dividends, you are probably still best advised to set up a company, rather than trade as a private individual. See the excellent series of tax planning books by Tax Cafe for more on this.

You also don't say anything about how you intend to extract your profits and an eventual exit strategy. Do you plan to just develop and pay yourself a mix of salary and dividends for the next 20 years? Or develop and occasionally keep a property as a rental investment to complement your other sources of income? I suspect more small builders and developers are doing this: it gives you a reliable income stream for daily living, if you need it, on into retirement, and an asset which will grow in value and could be sold if you need extra cash, instead of holding large amounts of cash as you move from project to project. If held within a company, it can also be more tax-effective to pass these assets on to any children or a spouse when you die, compared with holding them as an individual. However this can always change as Chancellors cannot resist tinkering with the tax system!

I hope the above is useful. Good luck, and please ask if you have any follow-up queries, or get in touch directly if you are interested in collaborating.

Thanks Tony for your in-depth reply, it was very useful and much appreciated.

I have some follow up questions if you don't mind:

1. The development finance.
a. Any hints on how to obtain info on presenting the financial plan (cost, GDV and 20% profit) to the bank?
b. The detailed projected cost of the build - how can I calculate this? I have seen construction costing books on Amazon.
c. If I obtained dev finance for a build and it came to the end of the period of the loan, say 18 months, and I could still not sell the property, how easy would it be to replace the loan with a BTL loan? I would then rent the property out till hopefully a purchaser can be obtained. Also, are banks willing to give a BTL to someone who has no other form of income? With a BTL loan, I expect I would be able to get some of the capital out to move onto the next build.
d. As you mentioned, I would set up a company and not trade as an individual. Are banks happy to lend money to a company like mine that has no track record? I suppose the low loan to GDV % would help? Or do they want to lend to an individual?

2. Structuring my activities.
Based on what I have read, I would have myself and my wife as directors. I would pay us £43k each in salaries and £5k each in dividends. Any savings on this £83.2k in after tax earnings can be loaned back to the business as a director's loan. Hope my calc is correct. I like your idea about keeping a property every now and then for rental. One would only be taxed when you sold it.
a. The exit strategy and extracting larger profits - please can you give me some ideas on this? I have heard of the Entrepreneur's Relief?

3. Various.
a. To obtain a project or site manager, would this be simply by googling under Findabuilder type websites or speaking to architects and getting a recommendation?
b. Finding plots that do not have planning permission already, how are you finding these? I seem to be generally finding plots already with planning in place.
c. Before purchasing a site without planning, and you have some uncertainties about the site and what you can achieve with it, do you quickly discuss the opportunities with your trusted planning consultant and possibly the council planner? Is this your modus operandi, your experience and theirs to assist you in the purchase decision?

Thanks Tony, best regards.

Reply to the comment left by "Tony Atkins" at "11/11/2016 - 12:11":

Thanks Tony for your in-depth reply, it was very useful and much appreciated.

I have some follow up questions if you don't mind:

1. The development finance.
a. Any hints on how to obtain info on presenting the financial plan (cost, GDV and 20% profit) to the bank?
b. The detailed projected cost of the build - how can I calculate this? I have seen construction costing books on Amazon.
c. If I obtained dev finance for a build and it came to the end of the period of the loan, say 18 months, and I could still not sell the property, how easy would it be to replace the loan with a BTL loan? I would then rent the property out till hopefully a purchaser can be obtained. Also, are banks willing to give a BTL to someone who has no other form of income? With a BTL loan, I expect I would be able to get some of the capital out to move onto the next build.
d. As you mentioned, I would set up a company and not trade as an individual. Are banks happy to lend money to a company like mine that has no track record? I suppose the low loan to GDV % would help? Or do they want to lend to an individual?

2. Structuring my activities.
Based on what I have read, I would have myself and my wife as directors. I would pay us £43k each in salaries and £5k each in dividends. Any savings on this £83.2k in after tax earnings can be loaned back to the business as a director's loan. Hope my calc is correct. I like your idea about keeping a property every now and then for rental. One would only be taxed when you sold it.
a. The exit strategy and extracting larger profits - please can you give me some ideas on this? I have heard of the Entrepreneur's Relief?

3. Various.
a. To obtain a project or site manager, would this be simply by googling under Findabuilder type websites or speaking to architects and getting a recommendation?
b. Finding plots that do not have planning permission already, how are you finding these? I seem to be generally finding plots already with planning in place.
c. Before purchasing a site without planning, and you have some uncertainties about the site and what you can achieve with it, do you quickly discuss the opportunities with your trusted planning consultant and possibly the council planner? Is this your modus operandi, your experience and theirs to assist you in the purchase decision?

Thanks Tony, best regards.

Reply to the comment left by "Tony Atkins" at "11/11/2016 - 12:11":

Thanks Tony for your in-depth reply, it was very useful and much appreciated.

I have some follow up questions if you don't mind:

1. The development finance.
a. Any hints on how to obtain info on presenting the financial plan (cost, GDV and 20% profit) to the bank?
b. The detailed projected cost of the build - how can I calculate this? I have seen construction costing books on Amazon.
c. If I obtained dev finance for a build and it came to the end of the period of the loan, say 18 months, and I could still not sell the property, how easy would it be to replace the loan with a BTL loan? I would then rent the property out till hopefully a purchaser can be obtained. Also, are banks willing to give a BTL to someone who has no other form of income? With a BTL loan, I expect I would be able to get some of the capital out to move onto the next build.
d. As you mentioned, I would set up a company and not trade as an individual. Are banks happy to lend money to a company like mine that has no track record? I suppose the low loan to GDV % would help? Or do they want to lend to an individual?

2. Structuring my activities.
Based on what I have read, I would have myself and my wife as directors. I would pay us £43k each in salaries and £5k each in dividends. Any savings on this £83.2k in after tax earnings can be loaned back to the business as a director's loan. Hope my calc is correct. I like your idea about keeping a property every now and then for rental. One would only be taxed when you sold it.
a. The exit strategy and extracting larger profits - please can you give me some ideas on this? I have heard of the Entrepreneur's Relief?

3. Various.
a. To obtain a project or site manager, would this be simply by googling under Findabuilder type websites or speaking to architects and getting a recommendation?
b. Finding plots that do not have planning permission already, how are you finding these? I seem to be generally finding plots already with planning in place.
c. Before purchasing a site without planning, and you have some uncertainties about the site and what you can achieve with it, do you quickly discuss the opportunities with your trusted planning consultant and possibly the council planner? Is this your modus operandi, your experience and theirs to assist you in the purchase decision?

Thanks Tony, best regards.

Reply to the comment left by "David Hunter" at "14/11/2016 - 08:30":

Hi David

We have invited Malcolm Jones from Brooklands Commercial Finance to comment on this thread. He specialises in development financing.

You can read Malcolm's member profile and contact him directly via this link >>> https://www.property118.com/member/?id=3353
.