The key differences between average and successful property developers

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How to be a property developer

 Ian Humphreys, Co-Founder, Brickflow

Anyone can call themselves a property developer. But there’s a big difference between the developer who’s bought and sold a couple of fixer-uppers, and the one who’s managing a thriving property portfolio.

Having worked with property developers for almost 20 years, there’s definitely a pattern in terms of those who do ok, and those who really make a mark as a successful developer.

What defines a successful property developer?

For me, success is financial independence. It’s being able to choose whether you work or not, and to get to that position you probably need all of these;

   – To own your own house outright
   – Other investment assets (like BTL or commercial property, and/or stocks and shares that provide a passive income)
   – A decent sized pension
   – Enough savings to sustain 20-25 years of your desired lifestyle

The amount this all comes to will obviously vary from person to person, and will largely depend on where you live and how you classify a ‘desirable’ lifestyle. If you or your dependents have expensive taste, the total will of course become significantly higher (!)

The road to success

From my experience, most property developers start out in the industry later in life. Not many take up property development straight out of school or university, and those that do tend to have followed parents or family members into the game.

Most do something else first, enabling them to build up some industry knowledge, as well as the capital to pave the way for a new career.

It’s safe to say then that property development isn’t a Gen-Z world, with the vast majority entering into the industry in their 30s or 40s. And if we assume most of us want to retire at 65 or 70, a property development career is normally limited to around 25 years.

 

3 skills you need to succeed

So, with experience and capital behind you, the path to success should be an easy one, right? Wrong. I’ve identified 3 key skills that are non negotiable when it comes to being a successful property developer.

   1. Risk management
   2. Planning & organisation
   3. Understanding development finance

The first two are dependent on each other. If you want to be a good risk manager, then you need to be good at planning and get yourself organised.

 

1. Risk management

Construction is full of risk. You can plan to the nth degree but you can never fully eliminate risk.

Even if your site goes exactly to plan, there are macro events that can affect the cost of your materials and labour, and even the end value of your project (Covid, recession, wars).

Good risk management is thinking about all of these things (which will also make you stand out to a lender). What happens if my planning is delayed for X months? The ideal time to bring a site to market is spring or late summer. If my planning is delayed by 3 months I’ll be launching in December. Not good.

If I’m carrying debt on my site, then planning delays are costing me profit, as my interest costs accumulate. Can I afford that delay?

Can I (or my contractor) secure my materials earlier to hedge costs?

What happens if interest rates go up? My development finance becomes more expensive, but also the cost of mortgages for my end buyers also goes up, so their buying power is reduced and my available buyer pool shrinks.

These are all things that need to be considered, plus a lot more. It’s one of the reasons why people with financial services backgrounds, project managers, management consultants and accountants transfer well to property development, as these skills are normally engrained.

 

2. Planning & organisation

Being adept at securing planning permission is a good thing, but that’s not what we’re talking about here. In this context, I mean visualising a goal and planning how to achieve it.

Based on the measures of success we defined earlier, financial independence for most people is probably a minimum net asset value in the region of £4m to £5m.

If your property development career is 25 years, you’re running one development project at a time and each project takes 2.5 years end to end, you have the potential to complete around 10 development schemes.

That means you need to clear (after tax and after all other stakeholders have been paid) a minimum of £500k per project to get to your £5m net asset value. And that’s if you don’t spend any money.

If you assume you spend £100k per year, then you’re going to spend £2.5m over the 25 year period, which means you really need to personally make a minimum of £750k, after tax, on every one of those 10 schemes. That’s quite a lot from a standing start.

 

3. Understanding development finance

Understanding how to structure finance is a super power and is underestimated by the vast majority of property developers.

The biggest factor that holds back property developers is inefficient equity deployment. In other words, putting too much of your own cash into a project. (I’m not suggesting you always borrow from investors either, as that normally means a profit share.)

Debt is always cheaper than equity, so maximise the former, and conserve the latter.

 

What you really want is a situation where most of the money is your own, so the majority or all of the profit is yours but you still have cash in the bank. Why? Because opportunity cost is normally always greater than the cost of interest.

If you put all of your money into one scheme and are offered an amazing opportunity part way through the development, you’ll be missing out. This is not good risk management or good planning. Like any investment strategy, diversifying is key.

As well as your equity, your other most precious resource is your personal time. By having multiple sites at different stages, you’re not only spreading your risk, you’re accelerating your business and yourself towards financial independence.

How to find success sooner

For every site you’re considering, the first thing you should do is search the market for your funding (Brickflow enables you to search over 35 lenders online). Questions you should ask; what deposit does this scheme need? Does this leave me with enough money to pursue other sites? If the answer to the latter is no, then consider another site.

Every lender calculates development finance differently, so if you ask 10 lenders how much you can borrow against a site, you’ll end up with 10 different answers.

Against a £5m GDV site with total costs of say £4m, at one end of the market, lenders will want a £1.5m deposit. At the other end it will be less than £500k.

Yes, the lender asking for less than £500k will be more expensive, but the cumulative effect of implementing a strategy that minimises your equity, is huge. If you have £1.5m of equity (lucky you), rather than running one site with the cheapest debt, you can now run three sites alongside each other with the same amount of equity; one site will be at practical completion whilst the next one is just starting. You would then have one, or maybe even two sites at various stages of planning.

When you look at your financial independence plan through this lens, you can now deliver up to 30 schemes in the same 25 year career. You now only have to make £250k per scheme to get to that £7.5m number. Hopefully you beat that return and become financially independent in half the time.

If you take two developers with the same skills and the same starting capital, the one with the best understanding of development finance will be the most successful. Complement this with strong risk management and solid planning and organisational skills, and they’ll get there all the sooner.

To improve your understanding of property development finance or how Brickflow can help you borrow smarter, get in touch on 020 4525 6764 / info@brickflow.com.

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