What are the pros and cons of property development?

We’ve all been captivated by the transformation journey of property, whether on the countless TV programmes or the extensive renovations of a neighbour’s home.  So what are the pros and cons of property development?

What are the pros of property development?

Perhaps the most prominent pros of property development are outward improvements of an area.  From disused land that’s overgrown and frequented by fly-tippers, or derelict buildings with boarded-up windows, property development transforms these eyesores. Of course, some developments can be a little short on aesthetics, but generally, it’s a positive change that can attract business and new people to an area.

On an individual basis, the principal pros of property development are profit.  If a developer chooses a decent site, has careful construction plans and sticks to a strict budget, they’re highly likely to achieve lucrative sales.  Likewise, buying and renovating a property for rental will return a higher yield than buying a property that is pristine and ready to let.

After completion, developers can obtain long-term finance, sometimes allowing the withdrawal of initial equity plus profits, without selling. Owning sought-after properties with only a very small amount of equity employed creates substantial leverage.

Another pro is that people can work for themselves, create their own working schedule, and benefit from a reduced capital gains tax of just 18% (28% for higher tax earners). But on a simpler level, property development allows people to put their own stamp on a property, creating a home to suit their needs. And development costs can be cut when people have the skills to do some of the work themselves.

COMPARE SPECIALIST FINANCE

Compare loans from 80+ development and bridging finance lenders - in minutes 

COMPARE LOANS

What are the cons of property development?

As with everything, there’s always a yin and yang, so it’s good to ask what are the cons of property development? A significant drawback is that property development takes time - from initial purchase through to final sale/rental can be years.  Therefore, profit and equity are tied up for years. Some developers mitigate this by having simultaneous developments at various stages of completion, using development finance to spread their equity over multiple projects.

In addition to lengthy waits for profit, the long-term nature of property development means market fluctuations can affect selling prices.  By the time the new development is ready for sale, hundreds of thousands of pounds might have dropped off the selling price due to a fall in the market.  Delays of even a couple of months can see huge price drops.

Some other cons of property development are:

• unexpected expenses often arise so contingency funds and planning are essential
  strict budgets
• building material costs can fluctuate so in phased construction, the latter stages may cost more
• slow markets mean it can take a long time to sell, meanwhile, mortgages have to be paid so developers may have to pay multiple mortgages
• most real-estate development has to be managed and if not done by the developer, hiring a project manager chips away at profits.

However, one of the biggest cons of property development is the potential to make a loss.  With so many market variables, developers can lose their entire, hard-earned equity and any assets used to secure funding.  That being said, most property developers UK wide successfully renovate, build and sell property for profit.

What is property development used for?

We are surrounded by countless property ventures of individuals or companies, but what is property development used for? Essentially, it involves buying land or buildings, constructing new buildings or refurbishing existing ones to create useable commercial or residential spaces that can be sold or rented for profit. Sometimes property development is solely for regeneration rather than profit, such as converting brownfield sites into recreational spaces or demolishing old 1960s tower blocks to start urban renewal.  When housing can no longer provide a decent standard of living, property development is used to build better homes.

Government legislation means a proportion of new residential developments must be affordable homes so people have a better chance of getting on the property ladder.  For first-time buyers, some schemes offer 25-75% part-ownership so people can invest and live in a property that would otherwise be out of their budget.  This is particularly common in London, where property prices are above the national average.

Property development is also used as a means of securing a house in a desired location with a limited budget – a property that needs substantial work will be priced accordingly.

For some people, becoming a property developer is something they stumble into, perhaps inheriting a property from a relative, or feel inspired by the transformation process of their own home that they go on to buy investment properties.  However, people start in the property business, negotiating property development loans is key to any successful project.

Are you ready to invest in property?

Now that the pros and cons have been highlighted, are you ready to invest in property? Whilst it’s always crucial to acknowledge the risks, the success stories outweigh the failed ventures.  At Brickflow, our comprehensive Smart Appraisal™ tool can help analyse the financials of potential development sites and asses their viability before making any major investment in property development.  As a marketplace for property development finance, Brickflow’s platform can be used to search and compare loans and gain an insight into the borrowing costs of development finance and bridging.

Most people who get into property development begin with small-scale projects since obtaining development finance is more complex for first-time developers than those with several projects under their belt. However, with a few extra securities in place, like employing an experienced project manager, lenders will consider first-time developer applications with a strong project and exit strategy.  Applying for development finance through specialist brokers can save weeks of time and effort, as they will eliminate any lenders who don’t consider first-time developers.  Brickflow’s comprehensive eligibility checker makes finding a suitable lender lightning fast, and brokers who use our site have had DIPs returned in less than two hours – an unofficial industry record.

Whatever the potential project, whether it’s building sixty houses or one Shoreditch studio flat, it always begs the question is property development worth it? The surest way to find out is to start the number crunching. When you’re ready to invest in property, register with Brickflow or tell your broker about our incredible tech that searches over 80 lenders in minutes.