From landlord to landlord-developer – the top investment strategy?

5 May 2021 | Investment

Interestingly, a significant majority of brownfield opportunities sit way below the scale necessary to interest the major homebuilders. The government has recognised this and is instead targeting small-scale developers, many of whom will be undertaking development projects for the first time.

This repository of buildings that are ripe for residential conversion has been increasing of late – look at the number of redundant stores in the wake of the recent collapse of Arcadia, Debenhams, et al. As our shopping habits have changed, so many high streets have become ghettos.

As these primary brands depart our town centres, the secondary retail around them is also affected. There is likely more to follow; when the furlough scheme ends, we will see a significant number of businesses collapse, and their properties, whether retail, commercial or industrial, will become vacant. One struggles to envisage a rush of buyers eager to snap them up.

So, what’s the government’s plan? Well, they would like to convert many of the empty properties in our town centres into residential homes. And with people living once more in the centre of our towns, this will fuel demand for the ancillary services and facilities that the local population will require. This will include entertainment, dining venues, and boutique-style shops, where town centres once more become a destination for shopping and entertainment.

Where does this leave the humble landlord? Surely property development is more complex than snapping up a couple of buy-to-lets? Luckily, the strategies are not as diverse as you might think. Some landlords undertake a renovation or a conversion of their buy-to-let properties before they rent them out, and many small-scale development projects are not much more complex than that. It is a highly leveraged business.

The small-scale property developer has an army of professionals on their team, including a project manager, all of whom have a significant amount of experience in development. The developer’s key actions are identifying the opportunity, appointing the team, and ensuring the finance is obtained.

Ah yes, the finance. Don’t property developers need to have a small fortune in the bank to develop their projects? The answer in most cases is ‘no’. Whereas landlords typically fund their buy-to-let deposits personally, developers often secure a significant part of their deposits from private investors. The remainder of the asset capital and the development funding is obtained from a single commercial lender.

What are the skills that this new small-scale developer might need? Very similar skills to those of a landlord, senior manager, or business owner. There has to be an overarching understanding of what’s involved in development, but most of the heavy lifting and technical issues are delegated to the professional team.

So, what are the advantages of development over buy-to-let investments? Well, one major difference is the speed with which capital is created. You can expect a small-scale development project that would typically return a six-figure profit to be completed within 12 to 24 months. For a buy to let investment, the pay-back period is usually a lot longer.

Let’s take a look at Addison and Alexis. Both have £50,000 to invest in property, and each quite likes the idea of buy-to-lets. Addison is a traditional sort, and he uses his £50,000 as a deposit on a £200,000 three-bed semi and then rents it out to a nice family. He clears around £300 per month in profit, but it will be several years before his equity growth enables him to remortgage and raise a deposit for buy-to-let number two.

Alexis, on the other hand, uses her £50,000 as the deposit on a small development project, a retail building that can be converted into flats using permitted development rights. She obtains the remainder of the financing she needs through a commercial lender, and she expects to receive her profit of £150,000 within 18-24 months. She can also make up any deposit shortfall by tapping into private investment.

And while Addison is still waiting for equity growth (and occasionally dealing with tenant issues and broken boilers), Alexis has made enough profit in 18 months to buy three of Addison’s buy-to-let houses AND has £50,000 left over to start her second development project.

Project things forward and, given that it’s possible to run multiple development projects at once, you can see how Alexis’s portfolio growth could be stratospheric compared to Addison’s. Or she could simply opt for a six-figure income and spend the money on whatever she wants.

Not surprisingly, this hybrid landlord-developer role is starting to become popular, as existing landlords discover that small-scale development is well within their capabilities. And with the government bending over backwards to give opportunities to new small-scale developers, plus a glut of convertible buildings coming onto the market in 2021, now could be the perfect time to try something different.

*Ritchie Clapson CEng MIStructE is co-founder of propertyCEO

This post has originally been featured in Property Investor Today.