If you were one of those kids that found inventive ways of boosting their pocket money, the ones who sought out more interesting opportunities than delivering newspapers—the car washers, the comic book dealers, the cake makers—then you will likely already have one or more side hustles on the go. But if you don’t, and you would like to find a way of earning extra, consider property development.
We are not talking about building an extension on your house – it may add value to your property, but you won’t see that money until you sell. And we are not looking at building a housing estate either. That isn’t something you can squeeze into your life as a side hustle. But between these two types of projects you will find doable and profitable options.
A flip is also known as a refurb or a doer upper. You take a tired residential house, do it up, and sell it at a profit. According to Hamptons, the average flip generated £48k in profit during the pandemic. That sounds great. But before you awaken your inner Nick Knowles, consider these two points.
Firstly, if you’re going to buy a property to do up, you’ll need to be able to fund both a mortgage deposit (usually 25% of the purchase price) and the cost of your renovations. You will also be tested for affordability by the mortgage company, plus you will need make repayments while you refurbish it.
Secondly, house prices rose significantly during the pandemic, so a significant part of that £48k profit uplift was due to the market rising during the period of ownership. Since the market is predicted to fall in 2023, average profits will likely be significantly diminished. Of course, you can cut down on the cost of renovations by doing some of the work yourself, and it’s entirely possible to do this during evenings and weekends, albeit that it can become a little all-consuming and means your project may take a little longer.
There is another property development side hustle that is far less well-known yet produces more profit for doing less work. Remarkably, this involves taking a step further UP the development ladder from a flip/refurb to what is known as ‘small-scale development’. This involves taking an existing commercial building (a shop, an office, or a light industrial unit) and converting it into flats.
In development terms, these projects are small beer. Compared to the sort of projects that medium and large-scale housebuilders take on, where profits run into seven, eight, and sometimes nine figures, and these deals are tiny in comparison. So, in industry terms, converting a single building into a few flats is considered relatively entry-level. Typically, you will be looking at creating between four and 20 flats and targeting a profit of between £100k and £500k for each project.
Less work than a flip
With a flip, you might buy a £200k property, spend tens of thousands on refurbishing it, and sell the result for a respectable £30-50k profit. But with a small-scale project, a similarly priced commercial building will likely have a development budget of £300k to £400k to do the work. And with a construction budget of that size, you won’t be managing tradespeople yourself or going on-site every spare minute to paint walls or regrout bathrooms. Instead, you can appoint a main contractor who will already employ all the tradespeople you will need. You can also afford to hire a professional construction project manager to oversee the whole project build-out on your behalf. Your role moves from being a hands-on project manager-cum-labourer to being the project’s CEO.
In short, you stay in the boardroom and let others get on with delivering your project. You will need to have weekly calls with your project manager, but you won’t have to commit anything like the same levels of time (or elbow-grease) as with a flip. And because you are creating more units, the profits are much bigger too.
Moving to the boardroom means you don’t need the same skills as a labourer/project manager. Instead, you’ll be employing a team of professionals, including an architect, structural engineer, main contractor, and the aforementioned project manager.
As these small-scale projects generate six-figure profits, a whole segment of the finance industry is geared up to lend money on them. I don’t mean Barclays or NatWest – we are talking about development funding comings from specialist lenders, including challenger banks, peer-to-peer lenders, and family funds. Many of these sources of finance operate via a broker network. So, tell your broker what you need, and they’ll go off and find the finance for you.
What about the money you will need to buy the commercial building in the first place? You will need to find a minimum deposit of 30% to buy the commercial property (so, perhaps £60k). Remember that if you were buying a £200k property to flip/refurbish, you would still have to put down a 25% deposit which is £50k, plus pay for the refurb costs on top, so it’s not a huge difference. But that still leaves you looking for £60k.
The good news is that commercial lenders will typically allow you to borrow the lion’s share of your deposit from private investors, who typically receive an annual interest rate of 8-10% – which is still highly attractive. The lender might want you to put in some money yourself, but it could be as little as 10% of the deposit – so, around £6k, which is a lot more palatable than finding £60k.
All of a sudden, things are much more accessible financially, albeit I would always recommend having circa £10k to £20k of funds available to make sure you’ve got some flexibility and comfort.
As a rule of thumb, you are likely to be looking at 18-24 months from having your offer accepted to banking the profits. And because you will be targeting a 20% profit margin based on your GDV (the selling price of your flats), your initial modest £6k investment will likely have delivered around £100k profit over that timeframe.
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