I Am A Property Developer – Ask Me Anything!

Good Morning David
You have raised some very interesting and significant questions. As this will be your first development, it is essential that you use experienced professionals (architect, quantity surveyor, contractor etc.) A good starting point would be the architect. It is often useful to ask for their recommendations on the other professionals that they have worked with in the past and who will work together as a team. You can then shadow them on your first few developments and gain the experience required to fulfil the role of project manager on you future developments.

Taking each of your points in order. Firstly you should look for a project that would give you a minimum profit of 20%. Please bear in mind that should you not have the right people in place this could easily turn into a 20% loss. With regards to development finance, today there are numerous lenders in this field. Most of them have different criteria for different developments. We at Brooklands are happy to give a free initial consultation for our clients.

With regards to your target of achieving a GDV of 3 million within 5 years, this is very achievable given your available capital. On this point, it may not be necessary to sell your two London flats if they are good investments. We could look at the possibility of re-financing them or using the equity as additional security for the development lender.

In response to your last post, Development finance: presentation of the financial plan, this is something that Brooklands would assist with; Detailed project cost, this is something that your QS will do for you, although you can use the internet to get approximate costs; extended marketing period, as you suggest they could be put onto BTLs or we could put them onto a short term loan that would release some capital and reduce the cost of borrowing; Borrowing vehicle, the lenders are equally happy to lend to both individuals and companies, however your lack of experience will limit the number of lenders that will consider this. You should obtain advice from an experienced property tax consultant with regards to the most appropriate structure as this will be dependant upon your current situation and your future plans.

Regards
Malcolm Jones

Reply to the comment left by "Malcolm Jones" at "14/11/2016 - 10:25":

Hi Malcolm, thank you for your very informative response. Much appreciated. Hopefully we will be in touch in the new year to discuss matters further.

Best regards

Hello David,

To answer your questions in order:

1a. The lender will advise on what information they need and what format. They all differ but in essence it's pretty obvious: purchase costs, development costs, build costs, sale costs, and estimated GDC with comparables to justify this, and your ultimate pre-tax profit margin. development finance. East Eight are a professional small developer in London - you can find examples of what they do here: http://www.simpleequity.co.uk/property/detail/302. Simple Equity is a crowdfunding site, but please be assured I have no relationship with East Eight: I'm just aware of their developments through the Property Tribes landlord website.

1b. The detailed projected cost of the build –you could try calculating this yourself but it's hard work and to be honest there are so many small variables, it's simplest just to use the Build Cost tables at Housebuilding and Renovating magazine and multiply this by your Gross Internal Area. You could also employ a QS - but that needs you to know what build system you plan to use - or pay an estimating service (several adverts can be found in H&R), or ask a builder for an estimate. but at the financing stage, it doesn't need to be that specific. Just say £1300/m2 and you will probably be all right, unless you're in central London.

1c and d. See the answers suggested by Brooklands. If you are paying yourself £43K in salary from your company, I believe you would need to do this for at least 6 months, but possibly two years for most lenders, before they would regard this as reliable enough to warrant a BTL loan in your own name.

2a. Exit strategy and extracting larger profits – I would prefer you see an accountant about this, and read a Tax Cafe book, as I'm not an expert in tax matters. At the moment you have to pay 28% in CGT if you sell a property in your own name, whereas the company would only pay corporation tax, which is headed for 18%. Entrepreneur’s Relief may be tricky for owners of property assets because you have to sell an active going concern if you want to secure the 10% relief rate of tax. If you are a sole owner-director of a development company, what have you got to sell, besides land and rent-generating assets? Their sale could count as a disposal of assets, not a proper business, so you may be ineligible for ER. This is why you need to talk with a tax professional.

As regards ongoing extraction of larger profits from the company to your personal assets, again you need to understand all the options relative to your personal tax position. The new dividend tax is a real blow. Tax Cafe's "Salaries versus Dividends" advises that, at the moment, one remaining good tax-saving ploy is to get the company to make hefty contributions to your SIPP. So for example, if you and your wife are earning £43K in salary each, plus £5K in dividends, as you suggest, then if you tried to extract any more, additional salary and dividends would be taxed at the higher rate, and so would interest on any Director's Loan. If the company contributes to your pension, however, at, say, £50K a year you can effectively double your rate of extraction without paying any extra tax. You won't get a tax refund on this contribution, but the money is then outside of the company and free to grow tax-free inside the SIPP. You could of course just increase your salary and get the income tax back by contributing to a SIPP as a private individual, but it's unclear how much longer the 40% tax refund will remain in place.

3a. To obtain a project or site manager: recommendation is best, or see H&R advertisments or in the trade press, or drive around the area and ask on some of the local building sites.

3b. Finding plots without planning permission: they are rarely advertised as such, unless they are being sold by commercial estate agents (i.e. potential office conversions). You just have to look out for sites with potential and use your imagination about how a site could be redeveloped, based on your growing understanding of how planning work. Finding land is probably the hardest job for any developer. You can just stick to buying sites with planning, but you will be expected to pay a full price for these and will be in competition with everyone else. The real profits come from buying a site without planning and securing planning permission for a scheme that makes better use of the land. If you don't do this, you are effectively just acting as a builder and will always be restricted to the returns available from construction alone.

c. Yes, you have to do lots of due diligence on a site with potential. Never buy just on the basis of your guesswork: you will rue the day if you tie up money in what proves to be a "dead" site. Councils often don't give unpaid advice nowadays, and you may be disappointed if you do pay, as they can just talk in generalities. The real results come from working with a planning consultant or architect to draw up some potential site layouts, then take it to Planning and ask for their views on the chances of success, asking them to choose between a series of options. That way, you can see the way the land lies. If you just give them one option, they generally just talk policy at you - which your team will already know - and don't reveal much that is constructive. Of course this all takes time and costs money, but it is money well spent even if you decide to walk away or lose out to another buyer, because you are learning all the time. Ideally you will have one construction project on the go at any one time, and be exploring potential sites in parallel with this, so you always have your money working for you.

There are "site finders" out there who will scour the internet looking for potential small sites for you, in exchange for a fee. Build relationships too with local estate agents, and ask them to flag up any sites with potential, though in my experience most agents are pretty clueless and think a wide plot with scope for an extension counts as a "development opportunity". Firms that market themselves as land valuers and surveyors are probably your best bet, as they are a cut above your typical 3-bed semi estate agents.

I have a simple (I hope) question -

- For a ground floor room in an unlicenced HMO (ie 2 floors, 5 rooms), is it required that the ground floor rooms have "escape windows"?
The room in question has a fire door and the way of escape from that room is to the hall and out through the front door.
The current window has a top opening but is not an escape window.

I ask as I have had a few mixed opinions so far!

Thanks

Hi Tony
Sorry, I think I posted on another thread by mistake. Are you interested in developments of circa 8 houses of small to medium size in North Hampshire? Also do you have any experience of developing conservation land where the conservation status is arguably damaged by new development (on largely non-conservation land) immediately next to the land in question? Many thanks Lisa

Reply to the comment left by "Barry Dean" at "22/11/2016 - 10:16":

Barry - many apologies for late reply - I somehow missed the alert email from Property118 telling me you had posted a query. Unfortunately I'm not a fire officer or environmental health officer, so I don't know the answer to your query; I suspect you probably won't need one, as there is a clear escape route and the window could be broken in an emergency. Fire officers tend to be more worried about rooms on the first floor and higher. To be on the safe side, you could ring the Fire Safety Officer at your local fire brigade, as they tend to be interested in giving straight advice; sometimes they also offer free no-strings safety inspections too, on an advisory basis.

Regards, Tony

Reply to the comment left by "Rufus Stone" at "23/02/2017 - 00:33":

Hello Lisa, I would be interested in such a small development, provided the timing's right as regards financing and if the scheme is viable from a profitability point of view. I haven't tackled a planning application on conservation land before, but I don't claim to be a planning expert; I would just rely on advice from an experienced planning consultant and undertake pre-app enquiries with the LA before buying the land or negotiating an option agreement with the owner, to see if it's a genuinely viable site. Please contact me directly if you have any proposals you'd like to discuss.

Best wishes, Tony