Mid-morning television would have us believe that the way to make a fast profit is through property development. However, make a few mistakes and it could prove to be very costly.
You can choose passion fruit mist for your office colour scheme, just don’t make commercial finance one of your mistakes.
Here are five common traps commercial property developers can fall into:
1. Buying in the wrong area
Cheap property isn’t always the green light to a bargain. A good property somewhere with bad transport links or an undesirable locale won’t attract tenants, despite the craftsmanship or practicality of your renovation. A property in an upcoming area or an existing area which has good network or passing trade links will always be preferable. Confusing a ‘bargain property’ with ‘poor investment’ is the number one mistake for commercial property development.
2. Planning
A building without planning permission isn’t a property development. It’s still just a property with potential – good or bad. Planning permission often expires after three years so it is always good practice to ensure that your own planning and development works are within the right timescales, especially if you are buying a property which already comes with planning permission attached. Planning application rules and policy guidelines can change, there is no guarantee that if you applied for planning permission a second time it will automatically be agreed again. While it might appear like a bargain plot ask yourself questions like:
- Is it serviced?
- Why hasn’t it already been developed?
- What’s happening underground?
- Is there any pollution or health risks?
- Are there any caveats to the planning permission?
3. Don’t be greedy
Completing a new office block or transforming a concrete perestroika-era hulk into a shiny new and contemporary space might well look ten times better than when you purchased it. However, that doesn’t necessarily mean that it’s worth ten times more. Putting your development on the market for too much money can risk it going not selling or renting and going stale. The commercial property market can be a savvy and competitive one and the bottom line is getting tenants in situ – a bit like the footballing idiom of getting bums on seats.
4. Going over budget
If you want a job doing well, do it yourself they say. But cutting out contractors completely can make your project run for a lot longer than you expected and cut into your profits. However, relying on contractors alone can allow a greater margin for errors and costly mistakes to happen if not micro-managed. So plan your development thoroughly. Ensure that all material, labour and costs are clearly set out alongside clear timescales. And always allow for unforeseen circumstances in your budget. Commercial lenders like to see a well-thought-out budget plan alongside a clear indication of which reliable tradespersons are undertaking the work. Going over budget doesn’t breed confidence in your project’s backers and, if not checked it can spread to other areas of your build. The biggest culprit of budget-breaking is structure and design; structural deficiencies escalate costs rapidly and innovative design is often a byword for expensive!
5. Commercial property development finance
Not having a suitable funding option in place can put the brakes on any commercial property development. Get your funding right and commercial property development can feel like plain sailing. There’s a multitude of different ways you can finance your development. By far the most popular is using a short-term bridging loan to fund the purchase and build before taking on a longer-term loan or commercial mortgage. Always consider and put in place a suitable exit from your short-term funding into either a refinance (if you are looking to rent) or whether you are looking to sell outright.
One way in which you shouldn’t make a mistake with your commercial property finance is with Funding Guru. We can help you, whatever your situation, and find you the right funding partner for your project. Contact us to talk through your options.
