Property Developer Facts, the Basic Truth Uncovered
A property developer normally looks for property that needs to be refurbished, renovated or developed and then sold on. He may also build new properties from scratch.
As a property developer you are only interested in the profit that is left after you sell the property.
A simple way which is used by many developers to tell if there is enough profit in it for them is to calculate all your costs including your contingency fund (your contingency fund should be set at, at least 10% of your overall budget), and, if there is at least a 20% profit margin left in it for you, then do the deal. If there isn’t 20%, then walk away.
PROPERTY NUMBER ONE
Cost of property: £80,000
Cost for renovation £23,000
Cost of associated fees, such as mortgage, solicitors etc. £2,000
Total potential cost £107,500
Realistic re-sell price according to research: £145,000
Profit = £37,500
Profit = 26%
DO THE DEAL
PROPERTY NUMBER TWO
Cost of property: £125,000
Cost of renovation £37,000
Cost of associated fees: £3,000
Total potential cost: £169,000
Realistic resell price according to research:
Profit = £21,000
Profit = 11%
WALK AWAY – DON’T DO THE DEAL
The reason the profit margin is set at 20% by the developers is to take into account, and protect themselves from, any shifts in the market or any unforeseen costs of renovation and anything else that occasionally comes along and throws a major spanner in the works.
If you set yourself 20% as your minimum, then, no matter what comes along, you should have a made a decent profit for your efforts at the end of the project.
As a property developer you have to be careful of something known as budget creep. This is where you pay a little bit more, maybe just a few pounds here and there, for lots of things that you think you need or want, and, before you know it, your budget has shot up by 30% and you are left wondering why.
Either stick to your budget, or, if you have to go over, make savings elsewhere. Try to use your contingency money mainly for emergencies that crop up that you weren’t expecting, not for things like getting a better set of door handles for the kitchen units than you had originally planned.
The last thing you want to do is to spend six months on a project, only to find out that, because you have overspent on it, the £20,000 profit you had projected at the beginning is only £2,500. This isn’t a lot to show for six months stress and hard work. Worst still would be to find your property is worth less than the amount you have put into it.
The 20% is just a guide line, but it is a useful one to follow – that is, if you want to stay in business as a property developer for the long haul and not be living on a knife’s edge with every other development, wondering if the profit you make is actually going to be worth it in the end.
This is one reason why a lot of novice developers give up. After they have spent a year renovating their first few properties, and worked out that they have actually earned far less money than they would have done if they had stayed in their nine to five job, they decide to chuck it in and go back to their nine to five.**Nothing on this website should be confused with financial or legal advice. If you need this, or any other type of advice, please seek the help of a competent professional. In addition, because real estate laws change all the time and differ from state to state, and even city to city in the same state, everything in these pages should be considered general marketing advice and ideas. Please see link to full Disclaimer at the bottom of this page.