Back in the days of the boom, being a property developer was easy. It didn’t really matter how many mistakes you made on your property development project, the rising market would nicely cover them all up for you. Of course the market has now changed which means that today’s property developers have no margin for error. This article aims to steer you clear of 5 of the common deadly sins which amateur property developers regularly commit.
To put it simply, if you want to be a successful property developer in today’s property market, make sure you avoid these 5 deadly sins of property development.
Deadly Sin #1 Paying too much when you buy
One of the key messages of the Build Your Property Empire, Home study course is that you make your money when you buy. Pure and simple! The value added through refurbishment should be treated as the icing on the cake.
Paying too much for a property is one of the most common mistakes made by new investors. It is absolutely essential to research your market well to ensure that the potential selling price is achievable when all costs and profit margins are taken into consideration. Never let yourself be ruled by emotions when buying.
Not paying too much for a property means buying at below market value. Remember, if you are refurbishing the property to sell on then you have to cover the purchasing costs, the costs of keeping the property empty while waiting for a sale and the actual costs of selling. Therefore it is essential to buy property at sufficiently below market value to at least allow for these costs. (The ideal of course is to purchase the property at a low enough price to allow for refurbishment costs as well.)
Deadly Sin #2 Paying too much for the refurbishment
The great temptation when refurbishing is to do too much. Whilst the wow factor is critical, you must keep your emotions out of the equation and strictly adhere to your budget and what your research tells you that your target market wants.
Homes with ‘Wow factor’ only sell quicker or at a higher price if your target buyer appreciates and more importantly, values the ‘Wow factor’.
Remember that you’re in this game to make money, not to win a home decorating award. Give the market what it wants, not what you think it wants!
Deadly Sin #3 Do all the work yourself to save money!
Personally I have never fallen into this trap. When I was in my day job, I used to work in nice, clean, modern office buildings in the city; the ones with shiny glass panels all round the exterior walls. I didn’t give up that life to wear overalls and go around with a toolbox fitting laminate floors!
However, I come across so many people who do fall for this one. People start off figuring out what refurbishment works are required. They then get a few quotations. After looking at the quotes and the prices they start asking themselves the question,
‘Well, just how hard can it be?’
If you find yourself asking this question then STOP and take this little quiz before you proceed any further. Ask yourself the following questions:
- Do you have a natural flair for interior decorating?
- Do you enjoy working on your own home?
- Are you competent with power tools?
- Do you have the time and energy?
- Do you have the patience?
Even if you answer YES to all the above and you clearly have the skills to do the job, you should then ask yourself the following:
- Can you make more money doing something else, then the cost of paying someone to do the refurbishment?
- While you are fitting a kitchen or tiling a floor, who is out there looking for your next deal? One of the key messages from the Build Your Property Empire, Home study course is that the most profitable use of your time is in finding the next deal.
Deadly Sin #4 insufficient cash-flow
Trading property is not like trading shares. The whole process from when you buy to when you sell can take anywhere from three to eight months. Basically, property is not a liquid commodity.
Proper planning is important here, especially if you wish to do this for a full time living. Although you may think you have hit the jackpot with a particular opportunity, it will be some time before you see any cash return. Meanwhile, the bills keep rolling in; the bank wants its money; and so on, and so on.
As with any business venture, cash flow is king. There is no point having a potential £50,000 profit up your sleeve if you can’t pay your bills. Unless you have sufficient cash reserves (one years salary), I highly recommend that you do two or three projects and put the money aside before you rush out and quit your job.
Deadly Sin #5 No exit strategy
There will be times when, despite meticulous research and planning, the property doesn’t sell. External influences such as a lull in the market that coincides with your selling date pop up from time to time. Be prepared for this with an exit strategy and you’ll be fine.
Firstly, never enter a project if you cannot afford any unforeseen holding costs.
Secondly, there is no shame in holding a good property. If the market doesn’t agree with you at that particular time, then rent it out for twelve months. Provided you have bought well (ie below market value) and added more value through refurbishment then the actual cost of the works, then you should be able to refinance the property at market value and pull out nearly all the capital you had invested in the deal.
Finally, should you be in a position where you must sell, then be prepared to forego most of the profit. Whilst £10,000 might be short of your £40,000 profit expectation, at least you will have learned some valuable lessons and still managed a small profit.
- 80% of your refurbishment project is research, planning and preparation. 20% is the actual refurbishment.
- Be realistic. If you do not know how to do it properly, pay someone else.
- If you intend to turn properties over, bank the equivalent to twelve months pay
- Have an alternative strategy in case the property doesn’t sell.
- Always buy below market value
- Give the market what it wants, not what you think it wants
- Plan your budget and stick to it