BTL is dead. What can landlords do instead?

Business Insights

The government has a target of 300,000 new homes per year, and because of that, there are opportunities. A raft of permitted development rights that allow non-residential buildings to be converted into residential homes without the need for planning permission have been created with a view to converting the ever-increasing number of brownfield sites that are well-suited to redevelopment as housing instead of building on our highly prized green belt.

But surely Messrs Barrett, Persimmon, and Taylor Wimpey have got this market sewn up?

As it turns out, they haven’t.

The 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.

The 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 there will be a glut of buyers waiting to snap them up.

Where does this leave the humble landlord? Surely property development is more complex than snapping up a couple of buy-to-lets? Interestingly, 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.

But 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.

Imagine you have £50k to invest in property, and that the multiverse is a thing. In one world, you use your £50k as a deposit on a £200k three-bed semi, which you then rent out. You clear around £300 per month in profit, but it will be several years before your equity growth enables you to remortgage and raise a deposit for buy-to-let number two.

Meanwhile, on another world, you use your £50k as the deposit on a small development project, a retail building that can be converted into flats using permitted development rights. You obtain the remainder of the financing you need through a commercial lender, and you expect to receive a profit of £150k within 18-24 months. You can also make up any deposit shortfall by tapping into private investment.

And while world-one-you is still waiting for equity growth (and occasionally dealing with broken boilers), world-two-you has made enough profit in 18 months to buy three of world-one-you’s buy-to-let houses AND has £50k left over to start a second development project.

Project things forward and, given that it’s possible to run multiple development projects at once, you can see how world two’s portfolio growth could be stratospheric compared to world one’s.

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.

By Ritchie Clapson CEng MIStructE, co-founder of propertyCEO


Ritchie Clapson CEng MIStructE is co-founder of propertyCEO, a nationwide property development and training company that helps people create a successful property development business in their spare time.