There’s a growing interest in small-scale property development

Ritchie Clapson is co-founder of propertyCEO

The term property development covers a lot of ground, and the smaller end of the scale is a lot less scary than many people imagine. Small-scale property development is an area that an increasing number of investors and landlords are moving into. And it can be lucrative.

What is small scale?

Typically, you’d be building somewhere between four and 20 flats and planning to make a minimum 20% margin on what you sell them for. As an example, let’s assume you started small and converted a small shop, office, or commercial building into four flats which you then sold for £150,000 each, then you would expect to make a profit of £120,000. If your next project saw you convert 12 flats, based on the same numbers, you’d make £360,000. In development terms, that’s relatively small beer, but compared to the long game that is buy-to-let or a graft-intensive doer-upper, nice numbers.

Why is it so lucrative? Converting unloved commercial property into attractive residential units generates a significant premium, particularly in a market where so many owners of commercial properties are financially challenged. And in my 40 years’ experience, relatively few developers know how to convert properties well.

How much work is involved?

As there’s more money involved compared to a flip (a small project where savvy DIYers and bargain hunters freshen up run-down homes and flip them on for a profit), developers can afford two things that make their lives considerably easier.

The first thing you can do is hire a main contractor. Where flippers and doer-uppers make do with a general builder and then employ many of the other trades directly, a small-scale developer uses a contractor who is responsible for all of the trades/subcontractors. This makes life considerably easier since there is only one relationship to manage, and the contractor then coordinates all of the construction team.

Secondly, developers can also afford to hire a project manager. The project manager’s job is to oversee the development for the developer. Worried you might be out of your depth (or get exasperated), turning up on-site to manage architects and contractors? Well, your project manager will do this for you. A highly experienced set of eyes and ears managing things on site, looking after your interests, and reporting back to you regularly. What’s not to like? They can even bang heads together and make sure you’re not taken advantage of. You get to play the role of CEO instead of being a hands-on-newbie-project-manager.

Additionally, because you have a main contractor AND a project manager, you don’t need to oversee everything yourself, leaving you with more time than if you were involved in a smaller project where you frequently need to be on site. In fact, most small-scale developers oversee their projects in their spare time.

What skills do you need?

Your critical job as the developer is to create your own development ‘brand’, pull a team together, get the finance sorted, and then find profitable deals. And, of course, you need to be able to make decisions under advisement from your professional team since you’re the ultimate boss. It’s very much like the role of the CEO, and as such, you need to have solid organisational and management skills, as well as good interpersonal and communication skills. I would never tell anyone that property development is easy, but many people already have the generic core skills to be able to do it successfully. And to correct another popular misconception, you typically need to invest less of your own money in a development than you might think.

Consider the risk

There is a reason why property developers take the lion’s share of the profit, while everyone else gets a fee, and primarily it’s all about risk. There’s no getting away from it – property development has many moving parts and is inherently risky. But, if you get yourself educated, it’s possible to de-risk the development process significantly. It’s the people who ‘jump in and go for it’ who tend to come a-cropper. I’ve certainly trained many developers who had learned the hard way that they didn’t know what they didn’t know.

Interestingly now is a great time to get into small-scale development. The government has just announced a whole range of Permitted Development Rights in England, making it possible to convert many commercial buildings without needing full planning permission. These rights come into effect from August 2021, so the timing couldn’t be better. In fact, of late the government seems to be giving good news to property developers, whereas for landlords, the last five years have been relatively gloomy, to say the least.

Leave a Reply