Are you looking to find out how to build a property portfolio?
As experienced property investment consultants, we understand that it’s not easy to get started in this industry – there are so many options out there. But our continued market research and unique position in the property investment industry means that we know the best ways to navigate investment and scale a lucrative portfolio.
If you’re looking to build a property portfolio, it is essential to know the ins and outs of how to do it successfully. In this guide, we’ll walk you through everything you need to know about becoming a successful portfolio landlord.
Whether you’re an experienced investor or a first-time buyer, BuyAssociation can help you plan and build your property portfolio and identify prime opportunities in the UK property market.
What is a property portfolio?
An investment property portfolio is a collection of assets owned by an individual, group or company to generate long-term passive income. This can include residential, commercial and industrial properties that are rented out to tenants on a long or short-term basis.
The main purpose of investing in a buy-to-let property portfolio is to generate passive income for the investor. This can be done by holding onto the properties for a long time, allowing them to appreciate in value over time and then selling them for a profit at a later date. The investor may also choose to rent out the properties as an alternative way of generating income from their investments.
A well-managed investment property portfolio should provide regular income throughout its life cycle and help to build wealth over time.
In spite of the fact that one investment property can generate a regular, predictable income, having several properties – especially diversified ones – can generate a healthy cash flow, potentially allowing you to retire early.
How to build a property portfolio in 8 steps
You may know the basics of property investing but feel overwhelmed when it comes to landlord responsibilities, diversification and portfolio building. Property portfolios are a long-term investment strategy that can provide steady income, so long as you approach it correctly.
Here are our top tips for starting, growing and sustaining a property portfolio in the UK:
1. Conduct market research and obtain advice
One of the first steps to building a strong portfolio is knowing what kind of properties are available, which locations are in demand and how much you’ll need to invest. It’s important to prioritise research before investing to ensure you gain a deep understanding of what costs will be incurred or what kind of value they will add to your portfolio.
Areas to research during your planning process should include:
- The property strategies available: As you start to consider property as an investment option, it’s important to understand that there are a variety of factors that determine what avenue to go down. Your financial situation, goals, investment horizons and tastes will all influence what you decide to invest in. First, pick from residential or commercial property investment. Then research other areas of the buy-to-let sector including HMOs, build-to-rent, social housing, and student properties. Find out which strategies would minimise risk and secure the best ROI over time.
- Rental demand and tenant type: You’ll need to think about rental demand and tenant type before marketing a rental property. Do you want people who are looking for a short-term lease, or do you want them to stay for the long haul? Is your business location in a trendy neighbourhood that attracts young professionals, or is it in a more family-friendly area? Once you’ve decided on the type of tenant you are looking for, it’s time to think about amenities and transport links in the area. The busier the area, the less likely the chance of void periods.
- Purchase price and ongoing costs: Before purchasing a buy-to-let property, you should ensure you have a funding solution that will cover the cost of running, repairing and renovating a property including purchase price and ongoing maintenance costs. There are also costs such as estate agents, property management companies, stamp duty, insurance and taxes to consider. Speaking to a financial advisor will help you determine affordability.
- Rental yield hotspots: As a landlord, you need to research average rental yield in your chosen city to determine potential rental profits. Rental yield is the amount of money that you earn from a rental property over the course of a year, divided by the total property value. This information will help determine what type of property would be profitable for you to purchase and rent out. You’ll also want to check the average rental prices and house prices in the area to ensure strong returns and high potential for capital growth.
An established investment consultancy like BuyAssociation will be able to provide you with advice on how best to proceed with your investment plans, as well as evaluate the funding solutions available and offer advice on which would be most suitable for your needs.
2. Set long-term plans and think ahead
If you’re thinking about buying your first buy-to-let property, it’s helpful to consider your long-term goals before making any decisions.
Do you want to make regular returns from rental income, or do you prefer to make a profit from capital growth when you sell the property? To see your property’s value increase, you may have to hold onto it for a very long time, leasing it out within this time-frame.
You will also have to take into account the amount of time you have to dedicate to your property business. When a vacancy occurs, consider whether you would like to be a hands-on landlord who finds tenants, collects rents, and manages maintenance issues. You can also hire a lettings and management agent to handle it for you. As a result, you will be able to focus on your current profession, business, or retirement plans.
Remember to also think about your legal obligations as a landlord and the buy-to-let taxes you may be subject to..
3. Steadily build a portfolio by starting small
When you’re beginning your property investment journey, there’s nothing more important than choosing your first property wisely.
When buying your first property, it’s tempting to purchase multiple properties at once in hope to get the biggest return. But if you want to grow an extensive portfolio in the long term, it’s best to start slowly – and with plenty of thought.
A low-risk option is ideal for first-time investors. A property in good condition that requires little renovation or repair will give you a better chance of achieving success as a landlord and growing your portfolio quickly.
4. Consider a limited company
When you own several properties you may find that registering as a limited company is more advantageous in terms of tax payments. Due to higher income tax rates, company tax is lower than individual tax. This means that by registering as a limited company, your profits can be retained within the company and used for future purchases without them being subject to income tax.
Many landlords choose to register their properties as a limited company because they get greater protection from tax liability: If you sell one of your buy-to-lets, you won’t be making a capital gain if you retain profits within the company, therefore eliminating capital gains tax.
5. Buy off-plan property
Firstly, the value of the property during the planning stage is likely to go up by the time it’s completed. If you buy at this point, you can benefit from this increase in value without having to wait until the end of construction.
Secondly, buying off-plan property means that you can negotiate with the developer to get a better deal than buying once construction has finalised. As a result, you may secure discounts on investments or receive more attractive terms.
Finally, buying off-plan property allows you to secure your investment before anyone else does, so it’s less likely that someone else will buy it out from under you before construction has even begun.
6. Hire a property manager
As you work towards building your property empire, managing your rental homes can become overwhelming as more responsibilities pile up. As your portfolio widens, the need to hire an external property manager grows. This helps to ensure all legal obligations are met and all tenants and properties are receiving the right level of service.
Some responsibilities of a property manager may include:
- Coordinate and supervise maintenance and work orders
- Hiring contractors to carry out maintenance work and repairs
- Addressing any tenant concerns and complaints
- Property marketing and listing vacant properties effectively
- Organising viewings and paperwork for new tenants.
- Depositing rents into your account after they are collected
It is common for property managers to receive around 8 to 12% of your rental income. While hiring help may reduce your overall returns, it may give you more time and give you the chance to buy more properties and free up your time.
7. Scale your portfolio of investment properties
Once you’ve taken control of your first property, started to earn a steady income and found your feet in the property investment industry. It’s time to increase your collection of property assets.
You can choose from purchasing land, building conversions, multi-unit blocks, off-plan property or brand new developments. To figure out your best second property type, it’s recommended that you speak with your investment consultant and accountant.
Finance solutions will help you scale and scale fast. Joint ventures and partnerships are a reliable and effective way to access someone else’s connections, funds and experience, thus elevating your property business and ability to scale. Moreover, applying for property finance can help you to obtain the investment properties you are looking for.
8. Have an exit strategy
Investing in property without having an exit strategy can be risky – it could reduce your chances of not generating substantial returns or receiving less back than what you originally invested upon sale.
An exit strategy is put in place to reduce chances of failure and mitigate risks. It provides investors with a clear objective or goal to work towards, guiding their investment timeline and financial forecasts. Here are some of the most common exit strategies:
- Time-based strategy: The idea of this exit strategy is to sell a single property (or multiple properties) after a set amount of years. This works well for those looking to sell as they approach retirement, however, investors should take into account tax liabilities that may be imposed upon sale (this will alter the total profit made from capital appreciation).
- Value-based strategy: Investors may choose a goal that they intend to meet value wise, rather than time wise. Put simply, once a property has achieved a particular value, it is sold to allow for new, higher-value investments. This strategy requires regular monitoring property forecasts, tenant needs and market fluctuations to prepare for value increases (or decreases).
- Yield-based strategy: Yield-based exit strategy is a strategy that is used when you plan to sell a property once the average yield drops and is no longer producing sufficient returns. You can use this method with any type of property, but it works best with residential properties and commercial properties that have multiple units. When yields drop below a certain threshold level, then it’s time to sell.
Specialising vs. Diversifying: Working out the best approach for your property portfolio
There are two approaches when it comes to building a property portfolio. The first is specialising, which means you focus on only one type of property. The second is diversifying, where you invest in multiple types of properties across different property classes or locations. This can help spread the risk of your investments if one type of property fails to perform well.
It’s important to consider your long-term goals before deciding which approach is best for you. If you’re looking for more income from rent, then specialising might be the way forward. But if you’re looking for capital growth and security, then diversifying could be better suited to your needs.
Specialisation pros and cons
Specialising involves choosing one or two types of properties and focusing on investing in those types of properties exclusively. If you’re looking for a stable investment that generates consistent returns, this could be a good option for you as you build up experience in these investment types.
The advantages of this approach include:
- Specialising can be a safety net for investors due to their developed expertise in one property type. The benefit of specialising is that it allows investors to build up their knowledge in a particular property type which means they will have more insight into the market and be able to make better decisions.
- As a new investor, it is wise to start with a specialised portfolio. This enables you to build your expertise and ensures less complications arise. Once you have established yourself in the property market and are generating income, you can look into diversification.
Disadvantages to consider include:
- Specialised portfolios can leave investors vulnerable to market changes and financial losses at certain times of year. For example, holiday let landlords may suffer void periods throughout the winter with no other property type to fall back on for rental income.
Diversification pros and cons
Many successful portfolio landlords focus on diversifying their assets to minimise risk. This approach involves spreading risk across different property types and locations. This is a good way to earn consistent income from multiple properties should market fluctuations occur.
Advantages of diversifying your property portfolio:
- Diversified assets can provide both long-term income and capital appreciation at the same time. This can be achieved by securing single-family homes that increase in value over time whilst leasing a multi-unit block to tenants for high rental returns from monthly rent payments.
- You are protected from changes in demand if you have various property types within your portfolio. If you have a block of apartments that are vacant, you can rely on rental income from single-let family homes and not suffer largely from financial losses.
Disadvantages to consider include:
- Diversification requires existing knowledge, patience and advice from management companies and investment consultancies. This investment strategy can be incredibly complex as portfolios are diversified due to the various legislations attached to the different asset classes.
10 benefits of building a property portfolio in the UK
Building a property portfolio in the UK is an excellent way to secure your financial future. With property prices rising year on year, you can be sure that your investment will pay off. Here are some of the reasons why building property portfolio in the UK is beneficial:
First and foremost, the UK is world-renowned for the stability of its property market and the many tax benefits that property investment offers. The UK is one of the most stable countries in the world when it comes to real estate, as well as being one of the best places in Europe for building a sustainable portfolio. The buy-to-let market is expected to grow substantially for years to come, meaning that return on investment (ROI) remains higher than ever.
2. Increased profit on rental payments
Rental income is a valuable source of income and can be maximised through multiple rental properties. The UK rental market is thriving, with rental yields at record highs for the last five years. Moreover, the average cost of rent rose by 9.5% in the space of a year from 2021-2022.
With this in mind, property investors can benefit from increased cash flow month-on-month as they receive payments from numerous tenants. This income not only helps to build wealth but can also cover expenses such as mortgage payments, landlord taxes, and repairs and renovations.
3. Minimised void periods
A property investment portfolio can help to reduce the impact of void periods. A void period is the time between tenants moving in and out of a property. The longer the void period, the more difficult it is for landlords to find new tenants.
This is why it’s important for landlords to have a broad range of properties within their portfolio so that if one property goes vacant, they have others with which they can cover their costs until a new tenant moves in.
4. Tax benefits
For property investors, the government offers numerous tax breaks, including a deduction for mortgage interest payments and other associated costs. There are also tax benefits available for limited companies who own multiple properties.
5. Access to Equity
If your property value increases, you can borrow money from equity. By borrowing against that increased value, you have the option of investing in other properties or providing funds to your family. In addition, you can save up this equity for later use when you may need it most.
The process is known as equity release and can be a useful way to access cash without having to sell one of your properties.
6. Diversified assets
It makes wise business sense to have a diverse portfolio of properties. Diversifying your assets minimises your risk, as is the case with all investments. Investing in multiple investments will give you a safety net if one investment does poorly
In the property sector, you can invest in a variety of assets. Some landlords and investors specialise in one asset class, such as student apartments or larger properties for families. However, diversification across asset classes is your best bet for spreading the risk.
Investing in a diversified portfolio has the major advantage of reducing the impact of market fluctuations.
Can I take out a mortgage to fund my property portfolio?
Portfolio mortgages are an option for landlords looking to expand their property investments. This enables investors to place all of their buy-to-let properties under one mortgage to eradicate conflicting paperwork and remove the hassle of obtaining a mortgage for each property. It is usually recommended that landlords have five or more properties before acquiring a portfolio mortgage.
How many properties is considered a portfolio?
It is commonly recognised that a portfolio landlord is one which has four or more buy-to-let properties. This applies to both individually owned and limited company owned properties.
Build your portfolio successfully with our award-winning property investment company
Are you looking to build a successful property investment portfolio? Have you been struggling to find the right properties in the right places, at the right time?
We can help.
Our trained and experienced consultants are here to guide you through the process of finding the perfect property for your portfolio, whether that’s an apartment in central Manchester or a holiday let in the Lake District. We’ll help you find what works best for your needs – and we’ll give you advice on how to make sure your investment is secure as well as profitable.
By becoming a member of our investor community, you’ll get first access to unique developments in the UK’s leading cities – including Manchester, Birmingham, Leeds and Liverpool. You’ll also have access to special offers from our partners, who can help guide you through the process from start to finish.