Can You Still Make Money Through Property Development

Posted by Kym on April 19th, 2010 at 05:19pm

How property development works: You buy something in bad condition, renovate it and immediately sell it on for a high profit. These are the type of properties usually avialble through tax liens. This type of amateur property developing is beloved of countless property shows on television, where we are almost always shown the things that can go horribly wrong.

Pros: Developing property is exciting and challenging, not least because you are turning something horrible into something wonderful. Property developing appeals to some deep instinct in us, which is to make something beautiful and usable out of unpromising material. In fact, all kinds of makeovers have this appeal, which is why they make such popular television, from House Doctor to What Not to Wear to Extreme Makeover and Look 10 Years Younger. We all love this kind of transformation, of turning the ugly duckling into a swan.

Cons: It can be difficult to make money unless you are extremely strict with yourself and work to the tightest budget and the shortest timescale. You have to know where to spend and where to save, where to cut corners and where to be lavish; also, you must be very exact with the market you are aiming at, and what that particular market requires. This is again where research comes in.

In order to make this kind of developing work, you have to be able to coordinate builders and building trades; work out your realistic expenses at every stage, not forgetting interest charges, council tax, stamp duty, VAT, capital gains tax, estate agents’ fees, for instance. There are very many costs involved in developing, including ‘dead’ costs such as stamp duty. These all have to be recovered on resale, otherwise you have not made a profit. You cannot just look at the purchase price and the selling price, and assume you have thereby made a killing.

When developing an existing property, unless you buy through tax lien certificates, as opposed to building from scratch, you cannot reclaim VAT. This means you have to add on 17.5 per cent (in the UK - VAT levels may differ in other countries) to all your building and renovation costs, including kitchen and bathroom appliances.

It is also difficult to make a good profit from a quick turnaround on property. Usually, a house or flat takes several years to reach its peak value and recoup buying and selling costs.

Under Finance