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Bricks and Mortals Are Still the New Blacks


By Sam Barrett


Jenny Tweed, associate partner at independent mortgage broker The Money Centre, has been developing property for the last 13 years. "I bought my first house, a derelict cottage, for £70,000 when I was 21. I bought it totally blind.


Thankfully, it was structurally sound, but it needed a lot of work, including new heating and re-plastering." Her decision paid off. Three months and £10,000 worth of home improvements later and the cottage had doubled in value. She sold it and bought another one. Eight properties down the line and she has built up a sizeable buy-to-let portfolio.


Today's market

It's harder to make that sort of profit now, but not impossible. Everyone is aware that spending some time and money on home improvements will increase the saleability of their property, so you will be competing against owner-occupiers.

As well as a reduced stock of development projects, the property market has changed in recent years. "Property prices aren't increasing as
much as they were, so you need to spend your money wisely," says David Robinson, team leader with estate agent Winkworth in Sheffield. However, Robinson still believes that, on average, you can double any money you invest in a development. "If you buy a house for £120,000 and put in £15,000, you could sell it for £150,000," he says.


Perfect timing

Picking the right property, however, will make a significant difference to the amount you can make. Much will depend on what you can afford to buy and how much money you have left for improvements.


Certain times of the year can prove more fruitful than others for picking up projects. "It may sound a bit morbid, but spring can be a good time because probate will have gone through on properties owned by people who died over the winter," Tweed says. Keeping an eye out for properties advertised without a chain helps identify these opportunities. "The couple of weeks before Christmas can also be good. Viewings slow down, so you can often put in a lower offer," Tweed adds.


Home improvements

Your plans for the building can also make a big difference to your profits. Adding another room is generally a good move. For example, you could spend £15,000 on an extension for a £130,000 three-bed semi to turn it into a £170,000 four-bed home. However, you may then be competing with properties in the same price bracket. So you have to weigh up whether a four-bed semi is more attractive than a three-bed detached.

But while such major jobs can make a big difference to the value of the property, the experts agree that the finish is what really counts. Dodgy decorating, wonky tiling and sloppy finishes will attract a prospective buyer's attention, potentially resulting in a lower offer or putting them off altogether. If you're paying a mortgage on the property until you sell it, these can be costly mistakes. So whether or not you're a dab hand with DIY it's often worth paying to get the professionals in.


Professional help

You may also want to hire someone to oversee the project if you have several different tradespeople working on it. "Dealing with contractors is like herding cats," says Marc Chenery, architect and property development consultant with Oxford-based Demarcation. He recommends either dealing with tradespeople who are recommended or employing someone to project-manage the development.

As well as ensuring better quality, employing a professional to oversee the project can save both time and legal battles. They will ensure that contracts are in place, often including details of completion dates and penalties for any overrun.

"We come across a lot of people who have got into difficulties with developments," says Peter Vinden, chairman of construction consultant The Vinden Partnership. The most common mistakes Vinden comes across are people running out of money, poor workmanship, and failure to comply with planning permission and building regulations.


Do your research

Find out first what's sold in the area and for how much. There are maximum prices and, however much you spend, you won't be able to go over these. Similarly, think about your potential buyers when you're developing your property. If the street's property stock is two-bedroom houses that are popular with first-time buyers, adding two extra bedrooms to an existing property might not realise the additional value if you are unable to attract a family buyer.

Tax pain

Another major pitfall is the pain of having to share the profit with the taxman. Capital gains tax (CGT), for example, will be liable on any profits you realise over your annual CGT allowance (£8,800 for 2006/7). This is calculated at your marginal rate of tax, although you will be able to take your costs into account. But there are ways round this. "If I find a property that will make a lot of money, I'll move in," says Tweed. "This can mean living in a building site, but it's worth it in the long run. You are close to the work and you won't be liable for CGT."

Alternatively, more and more people are combining developing with buy-to-let. CGT will still be payable when the property is eventually sold, but this can be reduced with taper relief. You may also be liable for income tax on any profit you make on the rent. But, if you're happy to take on the role of landlord or landlady, this can be a great way to enjoy profit from a property long after you've put down the paintbrush.


Financing your development

Unless you can buy outright with cash, you will need to get a mortgage. "If you're going to live in the property then, as long as it is habitable, you could get a residential mortgage," says James Cotton, a spokesperson from broker London & Country Mortgages. These mortgages have the most competitive rates, and the amount you can borrow will be based on your income.

If you intend to let the property out or you just want to develop it and sell it on, then a buy-to-let mortgage is more appropriate. Rates are slightly higher, but the amount you can borrow is based on the rental income the property can generate. "As the rental value will hopefully increase when you've finished, some lenders will revalue at this point. So you can borrow more money for your next project," Cotton says.

Beware of any tie-ins on mortgage deals, however. Some of the best deals come with redemption penalties in the first few years, but these could seriously scupper your plans to turn a fast profit by selling your property on quickly.


Editor's note: Please note that this article is targeted at UK readers.


With thanks to Interactive Investors.


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