In order to increase your profit margins, it’s extremely important to customise your development for the area you’re investing in– this should be the priority of your business plan. Does your prospective market consist of families or is it mainly for college students? Is it worth it to invest in upmarket fixtures or can you get by with just a budget renovation?
It’s easy to get carried away and end up way over-budget while fixing up your dream property, but you have to stay mindful of the state of your finances. Keep the profile of your prospective buyer or renter always in focus.
Customising your Developments for Buyers or Renters
As you begin your career in property development, you will need a plan of action that is designed around your short and long-term goals. An example of a short-term goal may including renovating a property to get it ready to sell quickly, whereas more long-term goals may involve rental income or capital growth.
Buying to rent is a strategy for the long term. With patience, you can increase your holdings to include multiple rental properties that can generate income. Getting a mortgage for a rental property is not difficult to manage if you can come up with the 25 per cent deposit.
You should remember that HMRC considers rental property income as salary, which means its subject to be taxed as income. If your income puts you in a higher rate, you will be taxed 40% of your earnings.
Buying to sell can get you a return on your investments more quickly. The faster you can turn over a property, the higher your profits will be.
But the hazard here is you’re more susceptible to fluctuations in the market: a downtrend can evaporate your profits or even result in a negative equity.
Once you sell a property you have to pay capital gains tax: at the moment it’s 18%-28% and an annual exemption of £10,900.
Generating Income From Your Properties
It’s highly advisable to develop a business plan and forecast your finances as carefully as possible to have an accurate picture of the return on your investment. While interest rates on savings remain low, it’s the obvious choice to maximize your investment funds by picking up the property.
The basic guideline is a target of 30 per cent or more when considering a property for reselling. This 30 per cent ROI has to be calculated without any renovation, purchasing or reselling costs.
If the renovation is really major, keep in mind that your percentage of profit on the sale of this finished property must include your salary or cost of living during your time holding it. It must also generate a margin that’s sufficient for investing in the next property.
Calculating Income From Your Property
When considering a rental property, begin with assessing its potential rental income, which is commonly expressed with a percentage. There are many different ways to calculate your margins, but its common to divide the total rental income (minus the expenses associated with the mortgage, maintenance fees and insurance) by the total investment to buy the property.
Use this handy rental income yield calculator to help figure things out:
[(Monthly Rental (minus expenses) x 12)/ total investment]* 100 = yield percent
For example, a monthly return of £750 and a startup investment of £225,000 would equal to:
(£750 x 12) / £225,000 = .04
.04 x 100 = 4% return.
In most cases, aim for a rental income yield of a minimum of 7%. Your rental income must surpass mortgage costs by at least 25% in order to cover expenses, fees, and the income lost in between tenants — realistically, you should plan for it to be empty for one month every year.
Understand Your Prospective Buyer or Tenant
Undertaking a renovation on a property–either for reselling or leasing– is expensive and you’ll need to stay focused on your prospective market and remember that this property is a business, and should be handled differently than your personal home.
If you end up renovating the space to your own standards of how you would want to live, you’re wasting a big opportunity for profit, especially if your market is college students or the goal is a quick sale.
Make a realistic budget and follow it closely, doing your best to avoid incurring extra costs. Design your renovations for the prospective tenants or buyers– there’s no need to go for high-end fixtures or unless your market is very upmarket. That said, you should invest wisely and not skimp on essentials. Try to get the best quality appliances and fittings that you can afford for your budget.
Investing in upgrading the exterior of the property will pay off by significantly increasing its value. You should pay attention to the landscaping and overall appearance outside of the property — many people decide how they feel about a space before they even go inside.
When making major changes to the interior, proceed with caution when changing the layout. It would be a mistake to cram a lot of bedrooms into your property as a way of increasing your profit margins.
Make sure the layout is a good fit for the needs of your prospective buyer or renter. One example is that open-plan kitchens are often preferred by families, while separate living spaces may be less appealing.
When you hire workers to do the renovation choose carefully because your profit margins will depend on getting good work done on time and on budget. If you don’t have personal knowledge of good workers who are available for your project, ask the people you know and trust if they can recommend someone.
You can also look at resources online like RatedPeople, TrustATrader or CheckaTrade to read reviews that can help you make an informed decision.
Make your Property Attractive to Prospective Buyers or Renters
With tenants getting more and more particular, and increasing competition, it’s necessary to update and maintain your property adequately. Anticipate trends and retain the value of your asset. Make sure that you have freshly painted walls and appealing furnishings. Outdated bathrooms and kitchens can really affect your bottom line and may be worth the investment of renovation.
It may seem risky but plenty of tenants now expect upmarket fixtures — renovation is the main avenue for increasing the value of the property while also broadening the range of interested tenants.
Extend this care to the exterior of the property. It must be well-kempt but it’s always a good idea to go beyond this basic standard. Placing plants or furniture on the patio or balcony will have a wonderful effect, especially in the summertime.
Neglecting this advice can put you at a major disadvantage. A garden that’s choked with weeds will feel like a huge burden to tenants before they’ve even decided to move in.
When a garden looks unkempt, they’ll focus on how much time and effort it will take to get it under control. And as a result, they’re likely to go look elsewhere.
Keep it Tidy and Clean
There are few things more off-putting than a stain, so ensure your beds are nicely made and with decent quality, clean linens. The appliances in the kitchen must be pristine, while the bathrooms must be clean and feature brand new white towels. It would be worth it to pay a reputable professional cleaner to give your space a good scrub before a showing, ensuring a sparkling presentation.
Finally, there are the four unforgivable blights that can turn buyers and tenants off:
- The mess created by pets
- The smell and tobacco left by smokers
- Children’s toys and food stains
- Chip pan grease and cooking smells
If prospective tenants are tripping over toys or getting covered in pet hair by sitting on the furniture, they can be turned off by considering your property.
Let There be Light
Before a showing, you should turn on the radiator, light the fireplace, put out some lit candles and, crucially, turn on every single light. It’s better to not open the windows unless there is an outdoor space. Make sure your property can really be shown in its best possible light to maximise interest, as well as your potential profits.