The old mantra ‘With risk comes reward’ springs to mind when advising entrepreneurs about the property development market.
If you’re a savvy and creative entrepreneur looking for an exciting venture, then property development could be the perfect industry for you.
However, property development is not for the faint-hearted and a huge amount of research must be conducted before dipping your toes into the market.
Research, research, research
You cannot jump in to the property development market without conducting adequate research of the local economy, supply and demand, social demographics, rental demand, selling prices and a host of other factors.
You’ll also need to sit down and brainstorm the type of property you want to invest in as well as your target market.
For example, do you want to specialise in one-bedroom flats or three-bedroom houses? Who are the type of people that will want to live in these properties?
Young professionals tend to go for city centre apartments close to train station and bus stops due to their lifestyle. Families tend to look for properties close to schools, parking and spacious environments.
The type of buyer will also affect how far you go with renovating the property. If you plan to sell or rent to students, the highest-quality furnishings may be an unnecessary expense and could cut in to your overall profit.
If you’re selling the property as a family home, then a tasteful decor will be essential to secure a signature.
A number of industry experts suggests property developers ‘make their money when they buy, not when they sell’. This means that successful property developers always buy at under market value – a technique that requires an exceptional knowledge of property auctions, off-market prices and other indicators of value.
If you do overpay for a property, you’re already cutting a significant chunk of potential profit when you sell. Even then, simply renovating the property is no guarantee that the property will sell above market value.
One way developers can maximise their chances of an under-valued property is to look for a motivated seller looking to shift their property.
A seller looking for a quick transaction is more likely to accept an offer that is below market value, suggesting that you might be on to a bargain.
Those considering entering the property development market will also need to decide whether this is a short-term venture or a long-term career as this can affect the type of properties you might be looking to buy.
Short-term developers will want to renovate easy properties for a quick sale – small flats, one-bedroom houses for instance – while long-term developers prefer to look to both capital growth and return yields for their income. As a result, renting might be their best strategy so they can profit from the extra monthly rental income.
Property development is a risky business and certainly not the easy process that BBC shows like ‘Homes Under The Hammer’ project on viewers.
There is the potential to make a small fortune from the industry as long as you’re willing to do some research, On the other hand, those jumping in with both feet without the proper research may find themselves in hot water.