How to Make Money by Self-Building

Many self-builders go on to do it again. Some go on to repeat the process several times, ending up with houses that are far superior to that of their peers, who simply chose to carry on living in their old home or moved more slowly up the property ladder by buying completed or existing homes. "You are lucky", one couple were told by a breathless visitor to their new home. "Luck had nothing to do with it", they replied. "We earned what we've got here by sheer hard work, by being prepared to camp out in temporary accommodation, and by our own foresight".

They, perhaps, represent the true self-builder: those who build to provide the home they want with either no mortgage or one they can at least comfortably afford. But there is another type of self-builder. Building your own home is almost invariably a profitable exercise and some who undertake it realise, when they do their sums, that they have often made more money in half a year than they could make flogging their guts out at work for several years. Not only that but the excitement, the empowerment that they experience, their sense of worth, is so much more than anything they could get from their previous careers.

That's when they change from simply seeking to build their own home to actually making money out of the process becoming one at a time developers.

That's also when they reach a fork in the road. They can choose to develop to become mortgage free, or, as many serial self-builders find, they can choose to develop bigger and better houses every time and take a more commercial approach.

Becoming mortgage-free

The first home usually gets the self-builder several rungs up the property ladder but with a mortgage that's as big as, if not bigger than, they had before.

The second home, assuming it's about the same size and value as the first self-build project, should halve the mortgage. The third should eliminate it.

The advantages are that so long as they only ever have one Principal Private Residence (PPR) plus the house they're building, which becomes their new PPR once they've sold the other one and moved in, any gain that they make is tax free.

Is such a self-builder a property developer? Not in the true sense of the term, but they are certainly in it for profit and, for many, their job becomes merely the vehicle by which they finance their repeated self-build projects. They may not be realising the profits in the form of income; instead they are storing up a tax-free gain within a single property portfolio their own home.

Becoming a small developer

This entails a complete career change where, whilst the original career may well remain in the background for a time for the self-builder, the business of property development inexorably becomes their principal occupation.

If they're not going to live in the new homes they build, they're going to have to pay tax on any gain that they make. And it won't be Capital Gains Tax (CGT). It will be Income Tax and the chances are that they're going to have to pay it at the highest rate because any other income will almost certainly have used up the lower tax bands.

Holding onto the home that you build and letting it out in the interim might seem a good option. But if the first supply isn't as a home for sale, and therefore zero rated for VAT purposes, effectively the project is going to cost 17.5% more.

And when you do eventually sell, there will be a liability for CGT if the gain exceeds your personal threshold (currently £9,200). If your income doesn't breach the 22% tax band then any gains that bring it up to £34,600 will be charged at 20%. Above this threshold the gain will be charged at 40%. Taper relief may mitigate the liability. Up to the third year of ownership this does not apply and the tax liability is on 100% of the gain.

For every full year of previous ownership between the end of the third full year and 10 years, the gain is reduced by 5%, reducing the tax liability to 60% of the gain. The Chancellor has recently indicated that taper relief is to be scrapped. He has also indicated that the tax rate for CGT will come down to 18% but as of going to press, nothing has been confirmed. Holding on to the old home and letting it out is a good option. But any profits you make from letting it out (and you can't set the mortgage against those profits) will be counted as income and liable for Income Tax. If you sell within two years then, as long as it was your previous PPR, it should be exempt from CGT.

Beware trying to repeatedly self-build, moving from house to house and raking off a bit of the profit to live on. If you have no other viable and demonstrable form of income the HMRC will deem that you have been trading and they will investigate through your various projects.

Should the small developer consider setting up a company?

Having a 'limited liability' company can seem an attractive option. Any profit that the company makes will be taxed at 20%. Directors taking dividends are deemed to have paid £10 tax for every £90 received. So those with no other income at the lower rate of tax could receive up to £35,842 in tax-free dividends. Effectively, a husband and wife partnership could therefore receive over £70,000 a year, tax free. But those on the higher rate of tax are required to pay 32.5% tax on their dividends and whilst they are deemed to have paid the £10 tax credit, that still leaves a further tax of 22.5% to be paid. Of course, the director could take a salary, but that would attract Income Tax and National Insurance contributions and reduce the profit the company makes - and the company can't pay a dividend unless it makes a profit. All of which, taken together with set-up costs and the possible need for auditors if you're going to borrow money, bring the tax liability perilously close to the 40% mark that the private individual on the higher rate of tax would be liable for.

And the minute lending institutions ask for personal guarantees, the benefits of limited liability simply disappear.

It's generally accepted that the advantages of forming a limited liability company are rapidly diminishing. If there is an advantage it is that in the event of a catastrophic financial setback - rendering the company unsustainable - the directors can wind a limited liability company up with no obligation to unsecured creditors.

Financing your build

A self-builder seeking to build a home to increase equity could probably do no better than to go to one of the specialist self-build mortgage companies, preferably one who could arrange for the finance to be delivered in advance stages.

Specialists such as BuildStore will also arrange finance for developers. But a port of call that many would be advised to pursue is their own bank, especially if they've built up a track record or can demonstrate a healthy equity from previous self-build projects.

How to maximise your profit

Watch the market. It's different in all areas. In London and the inner cities, the crying need is for smaller and cheaper accommodation and the rack em and stack em ethos prevails.

As you move out into the suburbs, whilst there is a market for high-class maisonettes there is also a market for good-quality family homes. But to compete with the so-called family homes that the developers are offering means that you're engaging competition unnecessarily. So make yours a little better and actually think about the needs of families.

In the rural towns and villages there may, in a slackening market, be a glut of four/five bedroom houses. But still in the Home Counties and Shires in particular, those homes that get away from the estate mentality can always find favour, regardless of market conditions.

Look for the niche that nobody else is filling. In areas which are popular for retirement, the emphasis of many developers has been high-density retirement complexes. So that leaves a niche for the traditional bungalow, which hardly anyone builds any more. And if you build in features that empathise with the needs of less-active older people, such as wider corridors and doors with easy access, the space generated can be equally attractive to the younger professional, thus doubling your potential market.

It's also important to ensure that rooms are of a good size. Brenda Foligno of Ferrino & Partners estate agents says, Don't be too greedy. Whilst in some cases it might be a good idea to have four bedrooms, if that results in cramped accommodation it could unbalance the property. Get the right proportion of house to garden and parking.

What is the builder's maxim?

It's least in most out. Spend as little as you can to get the most you can and that's not a bad maxim for the profit-driven self-builder. But to avoid competition with the developer, who is also looking for conformity in design to save costs, putting that little bit more thought into the design and that something extra into the specification should bring dividends.

Be careful not to put more into a property than you're ever going to get out. Go for eye catching, but if it's not going to sell your home more quickly or attract a price premium, forget it, says estate agent Brenda Foligno.

What to include -and what to leave out

The number of bedrooms will determine not only the price band that the home is in but whether or not a potential buyer will even be interested in viewing it. If the design is one that can be used flexibly to suit various computations of family and multigenerational living then it will be important to flag this up in any promotional literature.

'Kerb appeal' - what the home looks like from the road - is important, and many buyers have made up their minds by the time they get to the front door. 'Wow factor' sells homes and puts the value on them, and it can also work as a reinforcement of a buyer's intentions or bring about a complete change of mind.

Be sure not to stamp too much of your personality on the home when decorating. Buyers are generally attracted by a blank canvas which they can develop to their own tastes.

Is it worth spending money on high-tech features?

Top-of-the-range homes in inner city areas and the south-east could well benefit from smart home technology. But in most other areas the costs just wont be reflected in the value. Think about your buyers. If they are going to come from the brash nouveau riche sector, wired into all things modern, then they will insist on a home that fits in with this lifestyle. If, however, they are from a more staid strata of society, the very existence of, what will be for them, unintelligible programming will not cause them to pay a premium for the house.

The Kitchen

Without doubt the kitchen is one of the biggest selling points of a house. A dark cluttered kitchen will put many purchasers off. It will pay, too, to be aware of current fashions. Although you do not want to deck the room out in anything overly fashionable or outrageous, subtly alluding to current trends and opting for classic styles that will stand the test of time is the best option. Wider unit sections with high-gloss laminates are very much in vogue at present and colours can be either bold primary or translucent neutral. The fashion in worktops is definitely veering away from melamine, with timber, granite, marble or composites being the favourite choices. Whatever you choose, never forget that todays ultra-modern kitchen is tomorrows dated look. The best way to keep abreast of the fashions is by looking in the high-quality, top end of the range showrooms.

But do you need to buy from them? In London and the south-east and at the top end of the market areas around the cities, buyers might expect to see and require a recognisable label. But in general there is no such compunction. It is quite possible to get the designer look by mixing and matching basic unit carcasses and items from cost-effective outlets with, say, more expensive stone worktops. Consult estate agents, who should be able to give you a good idea of what the market in your area favours to avoid finding you have either over- or under-specified.

Flooring and wall tiling

Careful choice of tiles for both walls and floors can make such a difference; and that goes for the kitchen as well. In low to medium market houses, the public would normally expect tiles to the kitchen and carpet to the bedrooms. At the higher end of the price spectrum, natural wood flooring is almost de rigeur. But avoid trying to save money by using laminates. They rarely look like wood and almost always sound and feel cheap.

Underfloor heating or radiators?

Once again it depends on the lifestyle of the potential occupiers. If theyre going to be up and out in the morning and back home for a couple of hours in the evening as is the case with most young couples and many families these days then underfloor central heating, with its slow response time, is never going to be cost-effective to run and they might be better off with radiators. But fashion plays its part and there is no doubt that minimalist design is spoilt by radiators. And for those who set their store by having the best and most expensive, having underfloor central heating, whatever its practicality, is important.

At the middle to lower end of the market, however, its very difficult to make a case for underfloor central heating ever actually producing a price premium worth the initial cost.

The Bathrooms

After the kitchen, the rooms that really sell the house and establish its quality are the bathrooms. Look in the high quality showrooms and there is no other colour but white. And few can see that changing in the foreseeable future.

A cramped bathroom puts people off. Small shower cubicles and rickety sliding doors are equally detrimental. I f you have the space, go for a walk-in shower screen - but do not feel that you have to cram in a shower cubicle if there isn't enough space. buyers will always prefer a spacious room with a shower over the bath to one they can barely fit in because all the floor space is being taken up by a shower cubicle. Likewise, it is better not to have a bidet if the result is clutter. If you do have the space, consider installing an enclosure which has a threshold that lies flush with the floor.

Act with caution when thinking about creating a wetroom. Some people love them but they are an acquired taste and you might be narrowing your market.

And once again, in some areas tha label will count whilst in others careful mixing and matching of expensive with reasonable can produce the desired effect without costing the earth. Scrimp too much when buying your bathroom suite and it will not only look obviously cheap, but it will also wear quickly. pay too much and you just won't make the money back.

2008: Why it might be the best year yet for self-builders looking to leap up the ladder

The new year sees deepening concerns about the state of the housing market and has left many people investing money in bricks and mortar with lots to worry about. But would a stabilisation in house prices - the 0% growth that many analysts are forecasting - be such a bad thing for self-builders and renovators looking to climb the ladder - here's the issues:

• Greater availability of opportunities: The market for individual plots has been fuelled in recent years by a growing army of price-bubble inspired property developers competing with self builders for the same opportunities. Able to exact greater access to finance and willing to combine projects together in order to enjoy greater combined economies of sale, developers have been snapping up loads.

• The ladder isn't rising: it's not as easy to add lots of value by self-building or renovating when every other homeowner is enjoying massive returns due to a risisng market. When the market is flatter, self-builders and renovators can add value much more clearly so can step up the ladder quicker.

• With people generally more cautious about investing in their homes, it leaves less general demand for building work and, therefore, a greater availability of builders for those of us brave enough to undertake a project - and keeps their prices keener.

• There's a much keener pricing of properties with development potential at present. Estate agents are working with a glut of properties and have fewer potentially interested buyers. what this means for the rest of us is that there will be more opportunities and better prices.

...And how to minimise your risks in a nervous market.

• In a flat market there is always a demand for one-off properties at the top end. People are more discerning, and so it's often safest to pitch your properties at the higher end of the market.

• Make sure that any project you get involved with has a defined, in-built profit of at least 20% to cushion against any potential fall-in prices.

• Keep a closer reign on budgets. You can't rely on inflation to mask any budget 'failures' to ensure that you manage your finances especially tightly.

Built for just 155,000

Velma Skingsley managed to build her six bedroom traditional-style family home in Derbyshire for an astonishigly low 155,000. From the beginning of the project Velma refused to spend money on anything that she didn't view as entirely necessary. For example, rather than paying an architect to come up with a design, she scoured brochures and houseplan books and came up with her own ideas for a three storey hous, before finding someone in the area to draw up the plans for her.

As the build progressed, Velma fiercely negotiated with builders' merchants to achieve the lowest possible prices for materials - she managed to find natural stone for the exterior for just 27 per square metre. She used the same tctics when it came to labour.

The result is a three storey, spacious six bedroom family home, clad in natural stone and with a slate roof, valued in 2006 at around £450,000... Read More

David's Own Build

The perfect example of how to make money from self-building, David Snell's own new house, a five bedroom bungalow in Gloucestershire and his tenth self-build in as many years, has left him with a profit of around £100,000

In 1995, aged 50, David lost everything and was declared bankrupt after a building firm he guaranteed went bust - the recievers even took his pension.

Ten years on, through a series of self builds, David has used his extensive self-build knowledge to work his way back up the property ladder.

His current house was built for £192,500. In order to achieve this low build cost he opted for a rendered blockwork construction, with a brick plinth - the weathertight shell was built for around £83,000, including a detached garage. he supplied all the materials himself in order to shop around for the best deals, with his kitchen, including all appliances, coming in at 8,500.

Further Reading:

• Advice on Finance
• Solved: Common Building Problems and Their Solutions