Why Buy-to-Let when you can Build-to-Let?
Fame at last!
I was recently interviewed for an article in the excellent Your Property Network magazine. For anyone who hasn’t seen it, I thought I would reproduce the article here as it acts as a neat overview of the main methods I currently use to profit from property.
The exposure has generated a massive amount of interest and I’ve been inundated with emails from people wanting to know more about my methods. Many thanks to everyone who’s responded. If you haven’t yet received a reply please bear with me… I will be in touch shortly.
Why Buy-to-Let when you can Build-to-Let?
Like most people, my first venture into the property industry involved the purchase of a small buy-to-let house. Over a seven year period that original £28,000 investment was leveraged to amass a £10 million residential and commercial portfolio.
My methods were completely self taught. In the main, I refurbished rundown properties, increased their value and then re-mortgaged. At that time – when finance was readily available – it was a fantastic way to build a real estate portfolio. I sourced the properties via a network of estate agents and finders, all of whom knew that I had an insatiable appetite for rundown properties requiring full refurbishment. I used bridging funds to buy the houses for ‘cash’ and had two teams working full time to refurbish the houses. All lettings and management was done in house.
Why the move into developing?
Although I’d built a portfolio of 80 houses, I realised there was a limit to how much regular income I could earn from buy-to-let. After finance, management and maintenance costs, my monthly income was not going to make me a multi-millionaire anytime soon! I realised I needed to broaden my outlook and bought the site of an old Methodist church in my hometown of Westhoughton for £120,000. I managed to borrow 70% of the purchase price, paying a deposit of £36,000. I then obtained planning permission to demolish the church and replace with eight mews houses. In doing so I increased the land value to £200,000 which provided the equity I needed to get the build started.
Each of the eight houses had a market value of £125,000 so the gross development value (GDV) was £1m. The bank agreed to fund 70% of GDV, so I was able to secure £700,000 of funding. I owed £84,000 on the land, which left me with £616,000 to build the houses and cover all costs, which proved to be more than enough.
This one small development returned a profit of over £250,000 within around 18 months. It would take me years to generate that sort of income from my buy-to-let portfolio. I was hooked!
I went on to complete further development projects including apartments schemes and luxury barn conversions. Each time I would buy the land off-market and without planning permission. That way I could ensure I had good profit built into the land element of the deal before construction even began.
A few years ago, this approach provided me with the capital I needed for the self build of my home. I was able to purchase the site for a total of £110,000 as, on the face of it, there was very little chance of obtaining residential planning permission due to traffic restrictions on the access road. By applying my specialist planning knowledge, I quickly obtained the relevant permissions and could have sold the site straight away for at least £250,000. I must admit a quick £140,000 profit was very tempting – but in the end I decided to keep the site and build my 7,000 sq ft dream home.
Planning Gain Deals
I continued with my development projects but realised I could also make a substantial income simply by dealing in land. I would secure a site, obtain planning consent and then sell the ready-made scheme to another developer at a healthy margin. A good example of this was a former MOT garage not far from my home in Bolton. This was on the market with a local agent who hadn’t spotted its redevelopment potential. I bought it for £220,000 – what it was worth as a garage – obtained residential planning consent and sold it for £535,000 within six months, netting a staggering £300,000 profit for just a few hours work.
Finding good quality land was the key to my success. Last year I helped launch the land agency service Landlounge.com. It provides a free service to land owners enabling them to market their sites directly to property developers. If anyone is interested in planning gain or development projects, it’s the ideal place to start their search.
Do you need lots of capital to get started in developing?
I don’t think it’s possible to embark on a new build development without any funds at all as planning applications and finance broker fees need to be paid upfront. But if you have a little capital to hand – as little as £5k to £10k for a small single unit – it’s definitely something worth considering.
It’s still possible to obtain finance at 70% of GDV although admittedly, not as cheaply as a couple of years ago. But as long as you buy the land at the right price and employ a good architect to get the most from the site you stand a good chance of keeping costs below the 70% threshold. I’m about to embark on a project consisting of just a pair of semi-detached properties:
| GDV | £320,000 |
| 70% of GDV | £224,000 |
| Land | £55,000 |
| Construction | £150,000 (inc fees etc) |
| TOTAL | £205,000 |
This allows £19,000 for finance and should give a profit of around £80,000 after incentives. The finance isn’t cheap at around 1.5% per month so I can’t afford to keep the houses on the market for long. Luckily I’ve pre-sold one of them and will refinance the other if it hasn’t sold at time of completion. However, as there’s good profit in the scheme, I can afford to offer an attractive discount to encourage the sale and still make a healthy return.
There are ways to reduce the amount of upfront capital even further by entering into a joint venture with the landowner. These deals are becoming increasingly popular amongst developers large and small. They are easier to source than you may think – I’ve brokered many such deals between our LandLounge.com members – and because the developer doesn’t actually buy the land, they are much easier to fund. I’ve just agreed a JV deal on a site for 16 houses. We don’t intend to start until next year when the market has improved further, but essentially the landowner will be putting his land into the deal and we will be arranging the development. I’ve secured a loan from the bank to fund the build. On completion, the bank is repaid first, the landowner next (at an pre agreed figure) and we then split the profits. The deal should clear £400,000 for my company.
I go into a lot more detail about sourcing and structuring JV deals in my newsletter. Your readers can subscribe for free via my website: www.ukpropertyexpert.com
What construction experience do you need in order to start developing?
You don’t need a lot of experience if you employ a main contactor to carry out all the work under a fixed price contract. There are different types of contract but basically ‘fixed price’ means that the main contractor handles all the construction work within an up-front agreed price.
Over the years I’ve established a fantastic team of professionals – specialist financiers, planning specialists, architects, structural engineers, contractors, surveyors – who now take all the stress, hassle and much of the risk out of my development projects. If anyone is considering embarking on a new build project, they’re more than welcome to drop me a line and I’ll happy introduce them to my team.
Do you think development is an option for an average BMV investor?
Yes I do. But if you don’t have construction experience then always rely on a single, main contractor. Most banks will insist on this anyway. Development projects aren’t that different from renovating a house to sell… they just involve bigger numbers. The principals are the same. I’m not saying there isn’t a great deal to consider but if, like me, you start small – perhaps with a self build or single dwelling – it should help you conquer that initial learning curve and give you the confidence to move onto larger schemes.
I go into quite a bit of detail about new build developing in my newsletter. It’s written with the beginner in mind so should be an ideal resource for your readers. They can subscribe on my website: www.ukpropertyexpert.com
What other methods do you employ to make cash from property?
Over the last few months I’ve concentrated on the commercial property market. Certain retailers – the likes of Tesco, Aldi, Lidl, KFC – have benefited from the downturn and are desperate to secure new sites. So during the property crash I turned my attention to sourcing development sites on behalf of the retailers in return for finders fees. You’d be surprised how lucrative and simple it can be. For example, the finders fee for a small Tesco Express site can be £30k+.
Commercial investments with strong covenants are extremely sought after, especially in the current climate. I quickly learned that it’s possible to maximise profits further by finding a developer interested in building out the site as an investment property. I can then charge them an introduction fee too! I’ve used this tactic as part of a current project which will return over £300,000 once planning is granted.
Retail site finding has been a great way to ride these turbulent times and I’ll continue to dedicate a lot of my time to it even though I’m starting to venture back into developing and land trading. With such huge risk free profits to be made, I’d be crazy not to!
I’m currently writing a free report which reveals how easy it is to discover exactly what the retailers require, how to source a suitable site and how to claim your five figure introduction fee. I’ll be releasing the report to my newsletter subscribers soon. It will come under the umbrella of my new property education venture ukpropertyexpert.com. By sharing my knowledge of retail and residential site finding, planning gain, residential refurbishment, buy-to-let, self build and new build development, I hope to generate an on-going source of quality JV opportunities.
I also hope to explode the myth that a no-money-down property portfolio is a realistic way for newbie investors to “get rich quick”. I don’t believe that model is practical these days. It certainly isn’t a viable method of earning a life changing income in the short to medium term. So I’ll be going into more detail about the various strategies I use to generate substantial short term income which people can replicate to support, or even replace, their long term portfolio building strategies.
Anyone interested in finding out more should visit my website and subscribe to my free newsletter: www.ukpropertyexpert.com
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