July 26, 2019

How Do Property Developers Make Money?

Property developers make money by buying a property or site for less than it will be worth after the work is done, keeping costs under control, and then selling or refinancing for more than the project cost in total. The difference is the profit.

That sounds simple, but the profit depends on many small decisions made before and during the project. This guide explains where the money comes from, what it costs to get there, and how finance affects the final result.

The basic profit calculation

Developers work from one figure: the gross development value (GDV). This is the estimated value of the finished property, or the total value of all the units if there is more than one.

Profit is the GDV minus every cost of the project. Those costs usually include:

  • The purchase price
  • Stamp duty, legal fees and survey costs
  • Building and refurbishment costs
  • Professional fees, such as architects and planners
  • Finance costs, including interest and arrangement fees
  • Selling costs, such as agent and legal fees
  • A contingency fund for problems you did not expect

Here is a simple example. The figures are for illustration only and do not include tax.

ItemCost
Purchase price£250,000
Refurbishment£70,000
Stamp duty, legal and survey fees£20,000
Finance costs£18,000
Selling costs£9,000
Contingency£10,000
Total cost£377,000
Expected sale price (GDV)£450,000
Profit£73,000

In this example the profit is about 19% of the total cost. Many lenders look for a margin of around 15% to 20%, although this varies between lenders and projects. A margin that looks comfortable can shrink quickly if the build runs over budget or takes longer than planned, so it pays to run the figures carefully before you commit.

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The main ways developers make a profit

Buying below market value

Developers often find properties priced below their true value. Common sources are auctions, probate sales, properties that need work, and sellers who need to move quickly. Speed matters here, because a deal can be lost if the funds are not ready. Many buyers use auction finance so they can complete within the short deadline.

Adding value through refurbishment

Renovating a tired property is the most common route for individual developers. The aim is to spend enough to raise the sale value by more than the work costs.

  • Light refurbishment covers cosmetic work such as new kitchens, bathrooms, flooring and decoration. A light refurbishment bridging loan is often used for this type of project.
  • Heavy refurbishment covers structural changes, rewiring, new roofs or major layout changes. Heavy refurbishment bridging is designed for work on this scale.

Every property has a ceiling value, which is the most it is likely to sell for in that location. Spending more than the area can support will not bring the money back. Cheap finishes can also hold the value down, especially in kitchens and bathrooms, which buyers notice first. A well-known rule is to buy the weakest house on the best street, because the surrounding homes support the sale price.

Converting to a different use

Commercial buildings often offer more floor space than houses, so there is more room to create units. An empty office block can become flats, or a warehouse can become apartments. Local authorities often look favourably on conversions of buildings that have been empty for a long time. Some conversions may be possible under permitted development rights, but these have conditions, and you should always confirm the position with your local planning authority first.

Gaining planning permission

Land with planning permission is worth more than land without it. Some developers buy a site, secure permission and then sell it on to a larger developer, rather than building themselves. This can pay well, but it takes patience, because planning decisions can be slow and there is no guarantee of approval. You can read more about funding this stage in our guide to land bridging finance.

Adding more homes to what you already own

If you already own property, look at what could be added. A layout might be reworked to create an extra bedroom for rent. A large garden might be able to hold a new home. Building on land you already own removes the cost of buying a site, which leaves more of the margin as profit. A garden that is around three times the size of the house is often a good starting point, though every site depends on its own planning rules.

Refinancing and holding

Not every developer sells. Some refurbish a property, rent it out and refinance onto a longer-term mortgage, using the new value to repay the short-term loan. This is a common plan for investors who want rental income as well as growth. A clear plan for repaying the loan is essential, and our page on bridging loan exit options explains the routes available.

Choosing the right project

A good location is the strongest protection against a poor result. Developers now use data to support their choices as well as local knowledge. Sales history, rental demand, school ratings, transport links and local crime figures all help show where buyers and tenants want to live. This lowers the risk of building something the local market does not want.

How finance affects your profit

Most developers do not fund a whole project from their own savings. Borrowing lets them take on more projects and spread their own money further, which can increase the return on the money they put in. It also adds a cost, so the type of finance matters.

High street banks rarely suit this kind of project because their processes are slow and their criteria are strict. Specialist lenders understand the risks and can move faster, but terms differ widely. A small difference in interest rate or fees can remove thousands of pounds from your profit. You can test your own figures with our development finance calculator and our bridging loan calculator.

What can reduce a developer’s profit

  • Paying too much for the property or site
  • Underestimating building costs or leaving no contingency
  • Delays, because interest keeps building while the work is not finished
  • Spending beyond the ceiling value of the area
  • Planning refusals or conditions that add cost
  • A fall in the market before the property sells
  • Having no clear exit plan

A note on tax

Profit from buying, improving and selling property is usually treated as trading income, which can mean income tax or corporation tax instead of capital gains tax. Additional property purchases can also carry a higher rate of stamp duty. The correct treatment depends on your situation, so speak to a qualified accountant before you start.

Frequently asked questions

How much profit do property developers make?

It depends on the project, the location and how well costs are controlled. Many developers and lenders aim for a profit of around 15% to 20% of the project cost, but some projects return less and a few return more.

Do I need experience to get development finance?

Experience helps, and many lenders prefer it. Some lenders will consider first-time developers, particularly where there is an experienced team around them or where the project is smaller. Our lending criteria page explains what lenders usually look for.

How long does a development project take?

A light refurbishment can take a few months. Heavy refurbishments, conversions and new builds often take a year or more, especially when planning is involved. Allow for delays in your budget and your finance term.

Is property development better than buy-to-let?

They work differently. Development aims to produce a profit in a lump sum when the property is sold or refinanced. Buy-to-let aims to produce rental income over time and long-term growth. Some investors combine the two.

Speak to a specialist

If you are planning a development or refurbishment project, the right finance can protect your margin. Speak to Tiger Financial on 020 7965 7261, email hello@tigerfinancial.co.uk or get a quote.