Making Money From Property
by Chartered Surveyor Ian Rock MRICS
Earning mountains of cash from trading or renovating property can appear deceptively easy on primetime TV shows. But ‘property soaps’ have a tendency to distort the truth. Condensing a major building project into 50 minutes viewing time means complex issues can appear deceptively simple, and even the grumpiest builders become paragons of polite co-operation on camera, all culminating in a reassuringly upbeat ending.
Reality can be a little harsher. Making a decent profit from property is as much about applying the tough self discipline of knowing when not to spend, as it is about investing wisely to add value. There are many well established developers already out there, with sharp eyes and good contacts, so if you’re just starting out it’s important to establish some kind of competitive advantage over bigger rivals. Here are some suggested areas where small operators can make savings and boost profits:-
- Spotting an opportunity
When it comes to ‘doing up’ property to make money ideally you want one that looks worse than it really is. So it’s worth instructing a professional RICS survey and talking to the surveyor afterwards to get a clear picture of what’s it’s likely to cost. If the structure, roof and underground drainage are OK then you should be able to spend more money on things that matter to buyers such as décor, kitchens and bathrooms.
But there is more to property development that simply ‘retro-fitting’ run-down old houses.
To make serious money, it often helps to spot an opportunity for adding extra accommodation, such as changes of use converting redundant buildings to flats. Squeezing an additional new dwelling onto an existing plot can be very lucrative, a purpose for which corner plots are often well suited. But to develop successfully you need to first understand what buyers in the local market really want, something that estate agents are well placed to ascertain. The major obstacle to adding value through development rather than refurbishment is of course gaining planning permission.
- Ones to avoid
Avoid properties that need expensive structural work. Ideally, pick houses in shabby decorative condition that ‘look worse than they are’, needing a thorough makeover and updating to kitchens and bathrooms. Of course if you’re simply after the plot, and plan to demolish and redevelop, condition is not an issue. Also avoid buying in locations that are blighted – unless you happen to be ‘in the know’ and are prepared to take a major gamble.
One way to make significant savings and minimise your overheads, is to operate as a ‘serial renovator’. This is where you live in the property while it’s being done up, before moving on to the next project. Apart from saving on accommodation costs, this can also help reap significant tax advantages. There are some optimists who earn extra income from renting out rooms at a discounted rate in properties awaiting renovation – but issues of health & safety and gaining vacant possession when needed must first be carefully considered. This is a very different approach from conventional ‘property developers’ who operate as fully fledged businesses, often juggling several developments simultaneously.
- Builders & materials
We all want good quality building work done at a low price. It can help if you tackle some yourself, and it helps even more if you know a good builder. However, if you’re not a competent DIY enthusiast, you may be better off spending your time earning money doing what you’re good at, and then paying a professional builder. Either way, a golden rule of property development is to be clear at the outset exactly what work you want done, to specify it coherently, and then to stick with it. Clients who keep changing their minds clock up lots of expensive ‘extras’ charged by builders.
It is possible to gain significant financial advantage by making savings on materials. First carefully calculate all the bulk materials that your project will require – the bricks, sand, cement, tiles, drainage pipes, shingle etc, as well as listing bathroom fittings and kitchen units. Then submit your list to 2 or 3 competing builders’ merchants to obtain a quotation to supply the whole lot.
However, because your personal trade contacts will probably be nothing like as good as those of your local builder, so there may be an opportunity to use this for your mutual advantage. For example, you could suggest to your builder that for sourcing the same materials, you’d pay him a sum equivalent to, say, 15% below your best quote (providing the materials are of the same quality) with the builder keeping any further discount he can negotiate beyond that. Always check whether VAT is included in quoted prices.
You may also be able to save on labour costs. Individual subcontractors often do not need to be VAT registered (if earnings are below the annual threshold), so by employing them directly you can save on VAT charges. But be sure to never pay in advance for building work.
For help with estimating building costs online cost calculators are useful, typically averaging around £1500 per square metre floor area.
- Getting planning
It costs nothing to pop into your council planning department and have a friendly chat. Planning decisions are ultimately based on policies in the ‘local development plan’ so it’s worth familiarising yourself with these documents. Planning can be a complex subject, but much can be gleaned from freely available publications and advice on council websites.
As a rule of thumb, if someone else in the area has already been granted consent for a similar proposal, you ought to have a reasonable case. Seeking the advice of specialist planning consultants (often former planners themselves – ‘gamekeepers turned poachers’) could save wasting time pursuing obvious non-starters.
Check out our Rightsurvey blog page for more industry tips and secrets written by property professionals to help put you in control.