Property development has long been viewed as a lucrative model, but how does it stack up against other business opportunities? Ritchie Clapson from development training company propertyCEO looks at how small-scale development dodges some of the usual bullets that can plague other start-up businesses.
Businesses come in many shapes and sizes. At one end of the scale, you’ve got the pioneer – someone launching a brand-new product. Then there’s the more common ‘me too’ model, where someone decides to open a coffee shop, car lot, etc., because they believe there’s a gap in the market. And then there’s the franchisee, who takes an existing business and aims it at a new audience. A whole spectrum of very different businesses serving a vast range of needs, but all with one thing in common; sitting at the heart of each of them is an entrepreneur.
Most businesses are created and initially run by entrepreneurs. They’re not only the people with the big ideas, they’re also prepared to take risks and back themselves, and without them, there’d be no new businesses. But there’s often a problem. The skills that make entrepreneurs great at starting a business are not the same skills needed once that business is established. That’s when you need systems, processes, management, oversight, and planning. All companies are exposed to risks, such as changes in the marketplace, financial management and cash flow, building the right team, and managing that team to deliver the vision – there’s a long list. And if the entrepreneur lacks these essential skills, they’ll need to get people on board that have them AND get out of their way, pronto. But all too often, entrepreneurs remain resolutely at the helm of their baby, and the business fails because they don’t know how to run it properly. To be fair, very few people are taught how to run a business at college or university, which is perhaps one of the reasons we have such high failure rates. According to Startup Genome, around 60% of new businesses fail within their first three years, yet despite these worrying statistics, no entrepreneur starts a business thinking they will be in the failing majority.
So, starting a business is risky, but what makes small-scale property development a good choice for a budding entrepreneur? Here are eight reasons why I think it’s one of the most attractive business propositions around:
- Rock-solid product demand: Every new business needs to have a demand for its product or service, but in property development, the demand is unquestionable. Not only does everyone need somewhere to live, but we also currently build far fewer homes than are needed to meet demand. We fail to hit government targets every year, so that demand rolls over to the following year. The key is to build homes for the need market (1-3 beds) – not the want market (4+ beds) since that’s where the most robust demand is.
- A lack of competition: You wouldn’t open a coffee shop between two others, but even a successful café can soon fail if Starbucks arrives next door. This problem rarely occurs in housebuilding. If you built some flats and Persimmon built some more in the next town, you’d still have a viable business. There’s simply a huge capacity in the market.
- Managing cash flow is easier: Many businesses can’t control their cash flow even though they’re ultimately profitable, so they go bust. The most common problem is where overheads (employees, equipment, rent, raw materials, etc.) eat up their income, and then the business hits a lull and runs out of cash. A small-scale property developer rarely has employees or any equipment, they can work from home, plus all of their team (architect, contractor, etc.) are hired for one project at a time at a fixed price, so there is much greater control. Once the project is finished, the overheads go back to zero.
- Higher margins: In development, a healthy 20% profit margin based on the gross development value (GDV) is targeted. A £1m GDV scheme will target £200k profit with a minimum 10% contingency built into the construction costs to account for overspending (around £30k in this example). Developers also work with fixed-price lump sum contracts, so they have significant cost control. But even if our £1m GDV project overspent by £230k, the developer will still break even. This is very different from businesses that are run on much tighter margins where even a slight cost increase can terminally impact profitability.
- Multiple exits: A coffee shop sells coffee and cake, but it doesn’t have a Plan B if the market changes. But if the housing market slumps, then the renting market typically booms since more demand is created from those who are no longer buying, something that’s happening right now. The developer can then rent out the units until the market bounces back (it always does over time) before selling, having made a rental profit in the interim. It’s not ideal, but it’s an exit unavailable in most other businesses.
- Few barriers to entry: What experience do you need to run a new business? A developer predominantly needs organizational, management, decision-making, and people skills. All the technical skills are hired in, such as the architect, contractor, etc., and a professional project manager runs the project for the developer. Yes, you will need to learn how to run a successful development business, but there are some great training courses available, and within 6-12 months, you should easily be ready to take on a project.
- Funding availability: A developer needs to invest very little of their own money since there’s an entire development finance marketplace geared to lending the vast bulk of the funds required, even for first-time developers. With other business models, securing finance can be very tricky, often resulting in the entrepreneur having to invest more personally.
- Time: Small-scale property development is generally a spare time activity, whereas many other businesses require significantly more work and focus, particularly at the outset.
Few businesses are as highly leveraged as property development, and with the demand for housing growing consistently, now really is a great time to take advantage of the significant number of small-scale development opportunities that exist nationwide.
About the Author
Ritchie Clapson CEng MIStructE is an established developer, author, industry commentator, and co-founder of leading property development training company propertyCEO. To discover how you can get into property development, visit www.propertyceo.co.uk