Is property development the perfect business for you?
By Ritchie Clapson CEng MIStructE, co-founder of propertyCEO
Most people are happy with a regular pay cheque, reliable hours, five weeks annual leave, and a decent pension. But there are many who would like to let loose their inner entrepreneur, and last year, over 750,000 new companies were registered. Starting a business is one thing but keeping it going profitably year after year is quite another. On average, around 20% of UK businesses fail during their first two years, which rises to 45% after five years and 65% after ten years. So, what do people routinely get wrong when creating a new business? And is it possible to find a business model that doesn’t suffer from the usual challenges that affect most businesses?
In my view, the business model that makes the most sense to start in the current market (and it has done for a while) is a small-scale property development business – for example, turning an old shop or office building into a few new flats. Such a project should comfortably net a six-figure profit, and it’ll likely take 18-24 months from when you acquire the property to when you bank the proceeds. Here’s why property development (and doing small-scale projects in particular) has an edge compared to other types of business.
One of the rudimentary requirements of any new business is that there must be a market for the product or service it will be introducing. How many of us would like to have been descended from the inventors of things like cat’s eyes, post-it notes, or the slinky? What were our parents and grandparents doing with their time when they could have been getting creative and setting up their progeny for life? But it’s very easy to get this bit wrong. Remember the Sinclair C5, Betamax video recorders, and sprayable cheese? These are all products that memorably bombed, but there are millions of other less memorable ones.
Is there a demand for the product?
According to the UK Government, there is a massive housing shortage in this country. The government’s targets require us to build 300,000 new homes every year, and in recent years we’ve not come close to hitting this figure. And, of course, if we only build 150,000 in one year, the target for the following year must increase to 450,000 to make up for the shortfall. So, if you’re building homes of pretty much any shape or size, it’s fair to say there’s a very healthy demand for what you’re selling.
Linked to this, another critical advantage that property development has relates to technology. If you decide to play it safe and launch a product or service that already has a strong demand, then you usually have to differentiate. Otherwise, why would anyone buy your product over the current market leader? There’s a massive global demand for mobile phones, but if you decided to launch your own handset, it would have to be different from or better than the current offerings from Apple and Samsung; otherwise, no one will be interested. But with property, not only is there very little new technology (we still build houses by gluing bricks together with mortar), but there’s also no requirement for a new home to be built any differently from the millions of other homes that exist all over the country. You might have a few more USB charging points and some underfloor heating in the bathrooms, but the house you build today is in some ways no more advanced than the stuff we built years ago. You don’t even have to build it differently from the developer building out a similar project down the road.
Barriers to entry
If I want to open a dental practice, I’ll first need to study to become qualified to practice dentistry, which takes several years. Then I need to work for several more years in a practice to get experience. Only then could I think about establishing my own practice. However, I then run into the usual start-up issues that every entrepreneur must consider but which an employee doesn’t ever need to think about. Where’s the best location for my practice? Where will I get the money to buy the premises and equipment? How will I get new customers and recruit dentists to work for me? The list goes on. But none of these barriers to entry exist in property development.
If you decided to develop property today, you could find a property or piece of land to buy from a commercial agent (or just look on Rightmove or Zoopla). Providing that the deal stacks up, getting commercial finance and private investment to fund both the purchase and the development work is relatively straightforward because there is so much money out there looking for a good home. And when it comes to the skills needed to develop a property, you simply hire these in. Architects, Project Managers, Structural Engineers, and Contractors are all guns for hire and readily available. And, of course, they already know how to develop property. The skills you need as a developer are people, organisational, management, and decision-making skills. And I’d be amazed if you didn’t have these already. Now, don’t get me wrong – I’m not suggesting for one minute that you should dive into property development without getting trained first. But you can see how highly leveraged it is from a skills perspective compared to many other types of business.
Customers like to trust a new business before they engage, but how do you get this trust if you’re brand new? The first point to make here is that your end-user customers (i.e. the people that live in the homes you’ve built) don’t really care about your credibility or experience as a developer. The people you actually need to impress are property agents, commercial lenders and private investors. The key point to remember is that no one is expecting you to lay any bricks or produce any plans. You have a contractor and an architect on your team who will do that for you. And if you add up all of the years’ experience of your entire team and the number of projects they’ve worked on, you’ll discover that your business is already hugely experienced. The football team may have a new manager (you), but the players on the pitch have been doing their stuff for years and they give you credibility in spades.
Overheads and margins
We should also give a thought to employees, something that has all manner of associated costs, responsibilities, and regulation. Well, not so in property development. Yes, you might employ a virtual assistant to help you with some of your routine tasks, but because the model is so highly leveraged, the people that do most of the work are employed by someone else, like your contractor. You’re unlikely to end up hiring anyone yourself.
One of the things that kills many businesses is high fixed overheads and a lack of cashflow. As a developer, your running costs are minimal, plus you can take a break between projects without having to continually feed the overheads.
Another consideration should be your margins. Every business has to be profitable, but some industries have tighter margins than others. In property development, you’ll typically target a margin of 20% of the gross development value (GDV), i.e., what you sell your finished homes for. For example, convert a shop into ten flats worth £100k each, then your GDV is £1m, and your target margin is £200k. You don’t set this 20% margin figure yourself – it’s a requirement of your commercial lender, who will be lending you most of the funds to acquire the property and pay for its development. They don’t want you to lose money on the project, so they’ll make sure you’ve got enough profit to ride out a few storms and still end up in the black. You’ll also have a not-insignificant contingency fund to cater for unexpected costs, further protecting you against shirt-losing scenarios.
A final consideration for any new business is whether the government gives you any incentive to get started. In the case of property development, the government is desperate to get more new homes built and has discovered that the lowest-hanging fruit is converting the many thousands of unused shops and commercial buildings that exist all over the country. They’ve recently expanded the number of permitted development rights to convert these buildings into residential use without full planning permission being required, making it easier than ever to both borrow money anddodge the vagaries of our broken planning system and get out of the blocks.
Of course, there are many more things to consider when starting a new business, but I’ve covered some of the essential ones. You’ll never hear me say that property development is easy, but then starting any new business is never easy, no matter how optimistic the entrepreneur is. Reality always comes to bite at some point along the journey, and often quite hard. The key lies in ensuring you’ve done your homework at the outset and selected a business type and model that takes as much risk out of the equation as possible.
ABOUT THE AUTHOR
Ritchie Clapson CEng MIStructE is an established developer, author, industry commentator, and co-founder of leading property development training company propertyCEO. To discover how you can get into property development, visit www.propertyceo.co.uk