What is a property developer?
A property developer makes improvements of some kind to property, builds on land and thereby increasing its value. The developer may be an individual, but is more often a partnership, a Limited Company or a Public Limited Company.
There are two major categories of property development activity: land development and building development (also known as project development) the later being the most popular with the smaller developer.
Land developers typically acquire raw land (i.e real property with no improvements or infratucture) and improve it with utility connections, roads, etc. Building developers acquire raw land, improved land, and/or redevelopable property in order to construct building projects. The buildings are then sold entirely or in part to others, usually for a significant profit.
This is all well and good but how does the small property developer get started?
Small projects, terraced properties, shops, small offices, buying property in auction, these are all areas that the small property developer can consider. There is an old saying that goes, "you should start in the area that you know best." The reasoning behind this is obvious, as the area will be known, prices will be easier to determine and profits can be readily calculated.
Cashflow is king for the property developer as capital should be available for the initial purchase, as well as the cost of improvements, purchase costs and sale costs.
Buying a Small Terraced House for Profit
Lets look at the classic case of buying a small terraced property with potential. The fees for the purchase will be as follows:-
Initial Purchase Costs - 75,000
Initial Surveyors Fees - 200
Purchase Solicitors Fees - 400
Improvement Costs - 3,000
Cost of Sale (Estate Agent) - 800
Solicitors Fee (Sale) - 300
Total Cost - 79700
On the assumption that the property can be sold for around 90,000 - 95,000, the property developer could make a tidy net profit of between 10,300 - 15,300 and depending on the timeframe from purchase to sale, this could be the equivelant to earning of around 50,000 to 60,000 per year.
All this is well and good if you have the capital to be able to buy the property for cash but what if you haven't. Well, let's assume in this case that the property developer can only lay his hands on 25,000 as a maximum. This is how this could work:-
Initial Purchase Costs - 75,000
Initial Surveyors Fees - 200
Purchase Solicitors Fees - 400
Improvement Costs - 3,000
Cost of Sale (Estate Agent) - 800
Solicitors Fee (Sale) - 300
Total Cost - 79700
Plu the cost of borrowing
56,250 for say 3 months - 2,109
Less extra Solicitors Fees - 500
Loan Arrangement Fees - 1,125
Total extra cost of borrowing - 3,734
Based on the assumption that the property developer was borrowing 75% of the property value for a three month period would reduce the profit margin to a net profit of between 6566 - 11,566.
This hypothetical situation shows that ideally the property developer is better off financing the scheme from their own funds but as well as this profits can still be earned even though the majority of the money is borrowed. |
