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The Ten Million Dollar Question

Ritchie Clapson, co-founder of propertyCEO, comments

Imagine for a moment, if you would, that you had a rather large cheque coming your way (if you’re of an age where and haven’t ever had to deal with the quaint but rather odd concept of using small pieces of signed paper to authorise payments, then let’s go with a bank transfer). And, for the sake of argument, let’s hypothesise that, in terms of quantum, I’d decided to give you £10 million to spend on whatever you wanted. I know the title says dollars, but regrettably there’s not a lot of difference these days, so please excuse my poetic licence. I can tell what you’re thinking; my hypothetical generosity knows no bounds, but hey, I happen to think you’re worth it. So, once this imaginary money was in your account, what would you spend it on? This is the knotty but not unpleasant dilemma that I find myself regularly posing to a subset of my students who ask me one particular question. And while it hasn’t cost me a bean, over the years, I reckon I’ve collectively saved them millions of pounds and lengthened their lives by a fair few years apiece, which, when you think about it, isn’t too bad for what was, after all, a purely hypothetical investment on my part.

But before we get to the £10m, let me rewind a bit. When most people think about getting into property development, they’re usually swayed by the significant upside, namely that substantial profits can be made. Most of our students take on what we term ‘small-scale’ developments. These typically involve converting an existing commercial building or shop into flats and would be projected to make a profit of between £100k and £500k, depending on the project’s size and location. In property development terms, this is relatively small beer, well below the level many established developers would target. But for many people, including most first-time developers, these amounts are significant, often life-changing, particularly when you consider that these smaller projects typically have timescales of 18-24 months from acquiring the property to banking the profits and can be done working in one’s spare time.

So, while the financial upside is highly attractive, we then come to the downsides. And for most people, this will likely include a couple of key issues. Firstly, isn’t property development rather complicated and risky? And secondly, the thought of trying to manage a whole bunch of contractors, architects, structural engineers, and the like doesn’t exactly fill most people with joy. They imagine walking on-site for the first time with their L-plates firmly glued to their back and feeling every inch the newbie. And yet they’re surrounded by a team of battle-hardened professionals who have all been around the block a few times. How intimidating must that be? Surely they’d be like lambs to the slaughter, their wool being pulled very frequently over their eyes.

This is where I often encounter a widespread misconception about small-scale property development. When you convert an existing building into several flats, you may not think it’s a massive leap from doing a house flip or refurb. And in many respects, you’d be right; many of the basics are very similar. You’ll still be finding a project, getting the financing in place, appointing a team of professionals to do the work, and then selling the end product at a profit. And because most people who do flips and refurbs manage the project themselves (and sometimes get their hands dirty on-site, too), you could be excused for assuming that a conversion project will be exactly the same, just more so. It’s similar but more complicated because you’re creating multiple units rather than sprucing up a single property. But one of the significant differences will be your construction budget. Buy a £300k refurb project, and you might spend £50k doing the work. And of that £350k investment, I’d guess that £125k of it might be your own cash. But buy a £300k conversion project, and your development budget will likely be closer to £300k – a big difference. Yet surprisingly, only £10k of that £600k total might be your own money (I know, it’s pretty great leverage, financially speaking). 

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