Could property development be your perfect side hustle?
“How can I make some additional cash?” is a question on a lot of people’s minds at the moment. Property development isn’t for everyone, but it is something you might like to consider.
But what exactly do we mean when we say property development? After all, it’s a broad spectrum, with building a home extension at one end right through to building a housing estate on the other.
It’s probably fair to assume that starting the next Barratt Homes or Persimmon isn’t going to be something you’ll squeeze in while working your nine-to-five. But a couple of types of property development sit between the two on our development spectrum, and they look a lot more promising.
A flip, refurb, doer-upper
The first is to do a flip – take a tired residential house, do it up, and then sell it at a profit. According to Hamptons, the average flip generated £48k in profit during the pandemic. For many, this will sound less like a side hustle and more like a case for telling their boss to start recruiting their replacement. But before you start drafting your resignation letter, you should bear a few points in mind.
Firstly, if you’re going to buy a property to do up, you’ll need to be flush enough to fund both a mortgage deposit (usually 25% of the purchase price) and the cost of your renovations. You’ll also be tested for affordability by the mortgage company, plus you’ll 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 dented.
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.
So, doing a flip/refurb certainly makes it onto our side-hustle list, and of course, it’s a well-trodden path. You only have to look at the plethora of TV shows dedicated to the subject to know that there’s a fair amount of competition out there.
But there’s another property development side hustle that is far less well-known yet produces more profit for doing less work. Surprisingly, this involves taking a step further UP the development ladder from a flip/refurb to a segment known as ‘small-scale development’. Here you’ll be taking an existing commercial building of some type, e.g., a shop, an office, or a light industrial unit, and converting it into flats.
This is bound to raise many obvious questions, so let me run through them one at a time. Firstly, how small is ‘small-scale development’, and what sort of profits are we talking about? Typically, you’ll be looking at creating between four and 20 flats and targeting a profit of between £100k and £500k for each project.
So, why is it called ‘small-scale’ if it makes so much profit? Well, in development terms, these projects are small beer. Compare it 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.
Reducing your workload
But hold on a sec; how can building several flats involve less work than doing a single flip/refurb? Surely the building you’re working on is bigger, plus you’ve got more kitchens and bathrooms, etc., to fit? Well, the big difference lies in the scale and budget of these projects.
With a flip, you might buy a £200k property, spend tens of thousands on refurbishing it, and sell the result for a tidy £30-50k profit. But with a small-scale project, a similarly priced commercial building will likely have a development budget of £300-£400k to do the work. And with a construction budget of that size, you won’t be managing tradespeople yourself or going on-site to paint walls or regrout bathrooms.
Instead, you can appoint a main contractor who will already employ all the tradespeople you’ll need. You can also afford to hire a professional construction project manager to oversee the whole project build-out on your behalf. Your role changes from being a hands-on project manager-cum-labourer to being the project’s CEO.
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 project manager. It’s a hugely leveraged enterprise since you don’t do very much when it comes to the bricks-and-mortar aspect, which may come as a relief if your brick-laying skills are as bad as mine.
Financing the project
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 NatWest or Barclays – 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.
That still leaves you looking for £60k, but 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%. 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.
How long do these small-scale projects take?
Well, it varies, but as a rule of thumb, you’re likely to be looking at 18-24 months from having your offer accepted to banking the profits. And because you’ll 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 a circa £100k profit over that timeframe.
Property development can make you a lot of money, but it’s not an easy side hustle, nor is it without risk, so it is a good idea to get yourself some training before you start. However, if you’re looking to go large when it comes to your side hustle aspirations, small-scale property development can provide the leverage and profits.
Read more property development advice
Keen to learn more about property development? We recommend reading these other articles by Ritchie:
- The ‘ugly’ secret to one of the most overlooked (and profitable) property development strategies
- Frequently asked questions about small-scale property development
- Five common mistakes made by small-scale property developers
- Six ways you can make your small-scale property development projects stand out
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 propertyceo.co.uk.