Property Development Projects: What to Know Before Investing
Property Development Projects: What to Know Before Investing
Getting involved in property development projects is a great first step into property investment, as it doesn’t require a huge amount of starting capital nor experience. Property crowdfunding has democratised the investment process and made it a viable option for a wider audience. These projects are also good for buyers. Some of the properties built for the government’s Help to Buy scheme are now developed via crowdfunding. So, if you choose to invest in real estate development projects, you’ll also be doing your bit to help solve the UK’s housing shortage. Some peer to peer lending companies now offer crowdfunding for property development projects as an option for property development investment. But as with any type of significant investment, there are some things you should know before you get started.
1. Who is working on the property development?
A number of peer to peer platforms offering property development loans will use different third-party property developers, which makes it difficult to keep up to date with exactly what is happening with the development. By comparison, a peer to peer platform with its own affiliated development company (like House Crowd Developments) will have full control over its property development projects and will be better positioned to give you detailed insight into what’s going on. Your property developer should be willing to pay for reputable (and more expensive) contractors that agree to a fixed price and deadline. Yes, they are more expensive than the average builder, but your developer should be willing to pay this to provide a better service for investors. Feel free to ask them what deadline their contractors have committed to and how the agreement has been arranged.
Generally speaking, you want to make sure your developers are working with the best people at every stage; a very cautious approach, if you will. Your developers will ideally work with a reputable employers’ agent to ensure that work is done to a high standard and that regulations are being adhered to. They should also work with a RICS qualified surveyor’s firm to sign off on the agents’ work.
2.Look for additional layers of security
No matter what type of investment you’re looking at, you have to accept a certain level of risk. Even so, it isn’t too much to ask of your chosen property developer to provide you with some reassurance that it has a plan in place to protect your investment should something go wrong with any of its property development projects. Traditional development finance normally relies on banks to provide the bulk of the money needed, followed by a mix of debt and equity investment. As a result, banks have quite a lot of control – they can create clauses that allow them to take control of the development, and they often have the first charge over the assets. This leaves investors and developers at risk of losing their money, after the bank and financiers have taken what they believe to be rightfully theirs. Ideally, you want your chosen property developer to have a risk assessment specialist. If any investments are at risk, investors should see a return of capital before the developer takes their profit, by taking revenue generated from other developments to make up the shortfall.
Your property developer should also provide you with evidence of other ways they are protecting your money. At The House Crowd, our secured peer to peer lending options are always secured by a first legal charge against the land and property.
3. If you’re doing your research, they should, too
If you’re reading this blog, you’re obviously doing your research. It’s not too much to ask that your property developer does the same. They should be able to give you the results of a RICS survey, recent ‘sold’ prices in the area and prices per square foot achieved on similar properties. You should also ask for feedback from agents in the area, information on market liquidity and any economic forecasts. Even if they give you all the right answers to your questions the investment might not pay off, but you can at least be reassured that they are doing their homework. If they can’t provide details of their research, that should raise alarm bells.
4. Ask if they have secured planning permission
If you ask someone whether they would like a new property development built right near their home, they will probably say ‘no’. Still, many property developers just assume they’re going to get planning permission and get to work on the project before all the permissions have been granted. Securing planning permission isn’t easy. Appeals from locals are common and can happen both before and after permission is granted, causing huge delays. The planning permission process must be fully complete – with no appeals outstanding – before you invest.
5. Ask when you will get your money
It’s important to understand who in the investment chain will be paid first and in what order their money will be given back to them. By asking this, you’ll get a good idea of your developer’s priorities. The type of investment made will also determine when you get your money. Some are more interested in investing on an equity basis, rather than a fixed rate of return. In practice, equity-based investing has more risk attached to it – investors will normally only get paid after loans and other debts have been cleared. In addition, the returns are likely to be more variable and unpredictable. By comparison, with fixed-rate investment you’re guaranteed a certain amount of interest, no matter how long the property takes to sell.
6. Look north
London has always attracted property investment, but there’s so much going on in the North, particularly the North West. Largely due to the government’s ‘Northern Powerhouse’ campaign, more companies (particularly those in the technology sector) are moving out of London. The Silicon Canal has created a tech ecosystem in Birmingham and MediaCityUK hosts the likes of BBC, ITV and Ericsson in Greater Manchester. People want to live somewhere affordable with job opportunities nearby. These initiatives attract these people and that in turn increases demand for property. In fact, 40 percent of the houses in one of our developments in Cheshire sold on the opening day.
The House Crowd’s property development projects
As always, your capital is at risk and returns are not guaranteed with crowdfunded property development, but it’s a great way to get into property investment. At The House Crowd, we let you invest with just £1,000, and offer the opportunity to earn 10% p.a. via our cutting-edge property development lending platform. You can be safe in the knowledge that we always have full planning permission and only work with the top architects and large, reputable contractors, including our own development arm, House Crowd Developments. We specialise in building high-spec houses in the North West that are 100% crowdfunded.
If you’re interested in learning more about our property development projects, feel free to get in touch today.