How to become a property developer in Devon

Sarah Parker
Authored by Sarah Parker
Posted: Monday, June 19, 2023 - 10:16

Devon has been hit with a shortfall in the available property across the region, with empty second homes now becoming a driver in the decreasing supply. Could a new generation of developers be the answer to providing a fresh supply of housing?

In order to tackle Devon's enduring supply and demand disparity, it is evident that more than simply introducing new construction projects is required. Research reveals a notable surge in second home ownership since the pandemic began with the number of second homes reaching 13,363 in 2023, reflecting an 11% increase compared to the previous year. Given the circumstances, the implementation of a second home tax could be a possible solution to stimulate an increased flow of properties into the market and generate new avenues for property investors.

Although Devon has made plans to increase the number of new properties being built, the region still needs to meet the demand, especially regarding affordable dwellings.

According to research, over the next five years, East Devon has a target to build 946 homes per year, North Devon has 861 per year, and West Devon has a target of 1627. However, ONS records have discovered that between 2021-2022, East Devon completed 900 builds, North Devon completed 590, and West Devon completed 270, with all regions under target.

With the population steadily growing by 127k people since 2002, an 11.7% growth in population, more properties are still needed.

Property investment in Devon is lucrative, with a £28,787 increase in house prices across Devon between 2021-2022. East Devon saw the most significant house price increase of £32,598, an 8.98% increase, and in January 2023 alone, there was a £7,000 increase in one month. North Devon had the lowest growth of £19,785 - 5.92%.

According to Rightmove, most transactions in Devon over the past year involved terraced homes, which sold for an average of £265,949. Semi-detached homes sold for an average of £324,803, while detached homes sold for an average of £549,857.

While housing prices in Devon are increasing, so are the rental costs. North Devon saw a 4% rise this year, while the demand is currently at a five-month high while supply levels are falling across Devon.

However, property developers could see a healthy rental yield from areas in Devon if they invest in buy-to-lets. The highest rental yield in Devon is Torridge in North Devon at 4.2%, and in South Devon, Plymouth has the highest yield in that region at 4.1%. East Devon has a yield of 4%, West Devon at 3.8% and Mid Devon at 3.6%.

Many Devon residents insist that the Devon Council tax those with second homes more heavily to help minimise the number of empty houses across Devon. The government included tax premiums for second homes in May in its Levelling Up and Regeneration Bill. If passed through parliament, it would give councils more control to penalise those with empty houses, potentially reintroducing more properties into the rental market. With increased available properties, property investors could either invest in buy-to-lets to increase the number of rental properties or 'property flip'.

A recent poll of over 1,000 property investors, yielded fascinating results. The survey was completed by leading UK bridging finance company Finbri. According to the report, 45% of investors intend to engage in real estate in 2023. Regarding "property flips," the South West accounted for only 12.99%, while the South East accounted for 17.98% and London at 25.27%. This data demonstrates the disparities in property refurbishing patterns across regions of the UK and the potential for property investors to begin a 'property flip'.

Property development holds excellent allure for individuals seeking a reliable return on investment. The demand from prospective homeowners and property investors consistently exceeds the available supply.

Property investment offers two distinct advantages for those willing to take the risk.

Firstly, there is capital appreciation. Property ownership brings the benefit of your holdings increasing in value over time. You can realise substantial financial gains by strategically selling individual properties or a comprehensive portfolio. For instance, if your property development strategy involves purchasing real estate to renovate or refurbish it and then reselling it for a profit (known as property flipping), you may not have to wait for an extended period for your capital to appreciate. In fact, according to the findings of Bridging Market's 2022 survey, over 50% of property flippers reported a profit ranging from £10K to £50K, while only 1% incurred a loss.

Secondly, property investment provides income-generation opportunities. Renting out your property to tenants can be a reliable revenue source. Recent studies show that rental rates across the United Kingdom are rising, with specific areas experiencing a significant 14.6% increase in the year leading up to September 2022. It is noteworthy that Northern Ireland, rather than London as commonly assumed, witnessed the highest growth.

What is the recommended approach for initiating your venture into property development?

One of the most effective strategies for achieving a healthy profit margin on your initial endeavour is to keep things simple.

Engaging in a straightforward property development endeavour offers numerous advantages:

  1. Lower risk.
  2. Potential for a good return on investment.
  3. A less steep learning curve, especially for novice investors.
  4. Simpler financing process.
  5. A more significant number of opportunities.
  6. Possible reduction of overall expenses by personally undertaking certain aspects of the job as a tradesperson.

Acquiring a property to renovate for resale or rental purposes is considered one of the most straightforward forms of property development. Novice investors are sometimes attracted to run-down, antiquated houses and flats that require urgent repairs and superficial renovation.

One of the simplest forms of property development is purchasing a property to renovate, either for sale or rent.

Unlike commercial, storage, office, or student housing markets, residential properties do not require specialised expertise.

  • When engaging in a 'property flipping' project, it is advisable to target a profit margin of at least 20%.
  • If the profit margin falls short, being prepared to walk away from the deal is recommended.
  • Remember, the purchase price is within your control, while the market determines the sale price.

Here's some expert advice for novice developers:

  1. Each asset has a "ceiling value," representing the maximum price it can fetch in an open market sale. Even with expensive fixtures and finishing touches, the cost will not exceed this predetermined limit.
  2. Instead of buying the least desirable property on a prime street, consider exploring the next up-and-coming neighbourhood or promising street.
  3. Property investors suggest that open-plan living spaces may yield a higher return on investment compared to physical expansions of the property.
  4. Making a preliminary decision on whether to sell or lease your investment property is recommended. However, it is also wise to consider the alternative option as a contingency plan in case the primary plan does not materialise.

Now, let's consider the leasing aspect of your investment property.

If you don't intend to retain ownership unless substantial structural refurbishments are needed, you will likely seek a buy-to-let mortgage to finance the acquisition.

The location of your property acquisition and projected rental revenue will impact your choices in your development endeavours. Can you confirm if this property has adequate bedrooms to cater to the needs of families, young professionals, or students?

Just one tenant, a couple or renting to a family

A prevalent choice among new investors is to secure a single lease agreement with an individual tenant, a couple, or a family.

  • Your monthly rental income from the buy-to-let mortgage can cover the associated administration and maintenance expenses, resulting in a profitable venture.
  • This option offers the advantage of low management costs and a singular tenant relationship to oversee, with a high likelihood of long-term occupancy.
  • However, it's important to note that the annual profitability of your property is at risk during periods of vacancy and lack of occupancy, which leads to zero revenue generation.

HMOs - homes of multiple occupants

An alternative option to renting a property to a single tenant, which is particularly popular for conversions, is establishing a House in Multiple Occupation (HMO). This involves renting out individual rooms where tenants share common areas such as the kitchen, living space, and bathroom.

  • Lease agreements are negotiated individually with each tenant.
  • Opting for an HMO presents the potential for significantly higher monthly rental income, although it comes with increased management and maintenance costs.
  • For even greater profitability, you may consider a large HMO that accommodates five or more separate tenants, which entails additional management responsibilities. However, coordinating necessary renovations and maintenance tasks can pose more significant challenges.
  • Even if the property is not fully occupied, an HMO or Large HMO can still generate rental income.
  • It is important to note that there are now stricter planning requirements for HMOs, so it is advisable to review your local authorities' regulations before embarking on an HMO project.

Another option to consider is selling the property after completing the renovation.

If you intend to sell the property once it has been renovated, opting for long-term mortgage financing may not be the most suitable choice. Early repayment fees (ERFs) can significantly reduce your profits if you decide to pay off the mortgage ahead of schedule.

In this case, seeking short-term capital, often called bridge financing or bridging loans, would be more appropriate. This type of financing offers the flexibility to repay the loan upon project completion or whenever you prefer.

Key Phases for Successful Property Development

To achieve success as a property developer, it is essential to master three key phases:

Sourcing, Feasibility, and Planning:

During the sourcing phase, aim to find the most favourable property deals by conducting comprehensive market research. Analyse local house price trends, rental rates, and emerging areas. Familiarise yourself with the neighbourhood where you plan to invest. Instead of buying the worst house on the best street, consider adjacent streets that offer more affordability for you and potential buyers or renters.

The feasibility stage involves assessing the financial and practical viability of your project. Evaluate the feasibility of multiple theoretical projects to be prepared when an opportunity arises. Set budgets for each development aspect, such as surveyor's reports, architect and planning costs, property purchase deposit, financing options (e.g., mortgage or bridging finance), stamp duty, conveyancing fees, construction costs, and essential furnishings if renting. Consider estate agent fees, legal fees, and personal tax implications of selling, and if you decide to rent, account for letting agent fees if you're new to being a landlord.

It is wise to seek professional advice from a financial advisor or accountant knowledgeable about tax planning implications for buying property as an individual or through a property development company. Each approach has its advantages and disadvantages, so tailored guidance is crucial.

Financing and Exit Strategy:

Traditional banks may not be the best fit for property development funding due to their less flexible lending standards and higher interest rates. Engaging a reputable finance broker can help explore various financing options, including private banks that may not accept direct borrower approaches. Depending on the project's complexity and your available deposit, you may require multiple financial sources, such as buy-to-let mortgages, bridging finance, development finance, or second charges.

Understanding different financing options is vital. Consult a reliable broker to learn about available funding, associated costs, and general lending criteria. The Association of Bridging Loan Brokers & Lenders' directory is valuable for finding reputable bridge finance brokers and lenders.

An exit strategy is crucial for recovering your investment and realising profits. It involves deciding whether to sell the property, continue renting, and potentially refinance with a longer-term mortgage.

Construction, Scheduling, and Project Management:

Efficient project management is vital to ensure construction progresses as planned. Delays can increase financing costs, so meticulous planning is crucial. Determine whether to hire a principal contractor, a project manager or manage the works yourself based on the project's scale and your trade expertise. Avoid taking on more than you can handle. Proper planning and project management are essential to control costs and keep the project within budget.

Consider every detail of your development project, including the required trades, potential scheduling conflicts, and opportunities to upskill yourself to handle specific tasks. Break down the project into a schedule to estimate the duration of each phase.

By following these steps, you can develop an effective strategy for meeting the urgent need for housing and contribute to the growth and development of Devon.