Property Development Finances For your first development

Date Published:

04/06/2008

How much you need to borrow depends not only on the purchase price but how much it's going to cost to renovate. 'Some first-time developers come unstuck because they haven't budgeted for the building work except by how much they have to spend. You need to do it the other way round,' says Joe Martin of theBuilding Cost Information Service. Be clear what you want to do, price it meticulously and see whether you can afford it.

Get a reputable, recommended builder to give you a detailed estimate. It doesn't hurt to do your own research too. www.estimators-online.com can provide detailed labour and materials estimates on domestic jobs (from £70.50 inc VAT). The Property Makeover Price Guide (£17.99, from www.ricsbooks.com) is also a useful source of cost and budget information for home improvers and developers and includes prices for total project costs. Obviously, when you go ahead with the project, you'll need to get bespoke quotes

Contingency Fund: What You Need To Keep Back Once you have worked out all the costs involved, set aside a contingency fund. This is to cover unavoidable costs for which you haven't planned. Allow 10 to 20 per cent of the budget depending on the age/condition of the building.

Tax And All That

If you are going to make money from property, you need to think about how to do this tax efficiently. Consider setting up a company. “The advantage of this is that corporation taxes for small companies are approximately half as high as income tax rates,” says IFA Peter McGahan. (However, withdrawing money from the company will attract a tax liability). “If you don’t set up a company, you will be taxed on an income tax basis on that trade,” says McGahan. In the absence of any other agreement, this would be in proportion to the amount of profit you make each year. There are grants and tax reduction schemes that you may be eligible for depending on your project.

If the property isn't going to be your main home, you will be liable to Capital Gains Tax when you sell which you'll also need to factor in. The rules can be complex so seek advice from a qualified accountant. For contact details for your local Inland Revenue enquiry centre, visit www.hmrc.gov.uk.

Check out the mortgage calculator, loans, credit cards & savings comparison tools

The views represented in this article are those of the author and not of Channel 4. The purpose of the article is to provide general information only and does not constitute financial, investment, legal or other advice.You should not rely on any information provided in this article and you should always seek out independent professional advice relevant to your own particular circumstances.