This guide was last updated 10 May 2022
Whether you own one rental property or half a dozen, a buy-to-let portfolio can offer a reliable, and in some cases substantial, return on investment.
Whatever you want to get out of it — capital growth or investment returns — getting a foot on the rental property ladder and getting the best out of your investments can be a major undertaking fraught with pitfalls for the unwary. But, there are a few basics of property investing that successful professional landlords always apply to ensure that their investment has the best chance of success. That’s why we want to share our experience with mortgages and financing in the buy-to-let market to make sure that your buy-to-let portfolio turns into a useful nest egg rather than just a lame duck. So, just how do you build a buy to let portfolio?
A property portfolio is, very simply, a group of rental properties that are usually owned by an individual or company.
A property investment portfolio can provide a return on investment in two key ways. The first comes in the form of rental income derived from letting the property to tenants. The second involves the property values of the rental asset rising over time, the eventual goal being to sell it for more than you bought it.
That all depends on a number of investment decisions including how you plan to finance your purchases.
If you’re new to the property business, expanding too quickly may not be a good growth plan. A better property strategy to boost your chance of success is to start small and gain experience. For the greatest chance of success, developing a buy-to-let portfolio should be a long-term investment.
If, however, you’ve already got experience in the property business, as many professional landlords do, investment decisions like expansion and the faster acquisition of additional property aren’t bad investment options. If that’s the case, you can potentially build a portfolio of properties offering a decent rental return in one to two years.
There are many advantages to building a buy-to-let property portfolio. These include:
Now we’ve looked at some of the basics of property investing, let’s have a look at some of the tips and investment strategies that successful portfolio landlords use to extract the maximum return on investment from their investment properties.
Unfortunately, no real-estate investor starts out building a property investment portfolio with nothing. Neither, however, do you need a fortune. Buying any buy-to-let asset requires a sizeable deposit, but for those who already own or have substantial equity in their own houses, it becomes much easier to get on the investment property ladder.
Many people buying their first rental homes leverage the equity they hold in their own houses to pay the deposit on a buy-to-let mortgage. Banks and lenders usually offer favourable mortgage deals to enable investors to begin building their buy-to-let property portfolios and to begin making the best of property investment opportunities in the buy-to-let market.
The objective is, of course, to use the rental income to cover the mortgage payments and other costs while still making a profit.
The first part of any property strategy involves thinking about why you’re investing in that particular sector. What does investment success look like to you? Is it healthy rental returns, or is it the potential for capital growth, i.e., the eventual lump sum when you sell the asset?
Everyone’s Key Performance Indicators (KPIs) will be different, but there’s one KPI you need to monitor above all: Positive Cash Flow. You must ensure that the rental income covers the expenses (like mortgage payments) involved in letting any rental homes. Sudden maintenance costs can also crop up at any time. Void periods when the house is empty can happen too. Then there are taxes like stamp duty and Capital Gains Tax. Failure to adequately budget for these can wipe out your profits which could put both the investment and your family home (if you’ve remortgaged it) in jeopardy. If, however, you’ve done your sums correctly, it could give you the capital to expand.
Speaking of expansion, where do you want your portfolio of properties to be in ten years? Are you content with one or two rental homes or do you want to start building a property empire? Either way, without medium and long-term investment strategies, your real-estate adventure and any associated investment decisions will lack structure and focus and may prevent you from achieving your goal of investment success.
But we’re getting a little ahead of ourselves. Every journey begins with a single step and before you set your sights on building that property empire you’ll need to:
Knowledge and an understanding of the buy-to-let market are essential for determining an investment’s potential rental return and any future investment strategies. It’s also important for when the time comes to implement your growth plan and diversify your property portfolio. Any investor needs to be asking themselves the following questions:
Struggling to find answers to these questions? Ask! Don’t be afraid to seek advice! It’s better to listen to and learn from others in the property business who’ve had some success than getting stuck stumbling around in the dark.
If you start doing too much too soon, you may get in over your head. That’s why, if you’re new to the property business and want to give yourself the best chance of success, it’s best to start with just one or two buy-to-let properties.
Starting small will give you the valuable experience and knowledge you’ll be able to utilise going forward, should you wish to expand by buying additional property. You will make mistakes — that’s guaranteed — but making them on a smaller scale means that you can learn from them without the potentially disastrous consequences if you’ve overstretched yourself and grown your portfolio too quickly.
Another aspect of starting small is starting local. Sure, if you live in London, property prices in Liverpool might make a house or apartment there look like a good investment option. How are you going to manage it without a letting agent, though? If you’re intent on being a more hands-on landlord, it’s best to start locally where you have a better grasp of the rental market. It means you can use your existing contacts and networks to make the letting process smoother and cheaper, like, for example, when it comes to repairing and maintenance work on the building.
It could be a good idea to buy your investment properties in the name of a limited company rather than in your own name. It may drastically lower the tax bill on your investments and mean that your personal assets are financially protected if your investment strategy doesn’t work out. Before you decide to set up a limited liability company, however, we’d advise you to seek independent advice on the legal and tax ramifications.
Paying too much for rental homes will severely eat into your profit margins and is best avoided. That may sound simplistic; after all, house prices are house prices, aren’t they? Not necessarily.
Don’t be afraid to offer well below the asking price. The worst that can happen is that the seller says no. More likely is that they’ll be willing to negotiate and meet you closer to your offer.
For the best chance of success, be patient and wait for the right place. You don’t want to end up with a return on investment too slim to allow you to expand or worse, not cover your costs.
For portfolio landlords, there are two schools of thought on choosing either specialising or diversifying as long-term investment strategies. Depending on the rental market in which you’re operating, both can stand a strong chance of success.
Specialising in one type of property means you’ll gain a huge amount of knowledge about how to profitably operate in that sector of the buy-to-let market and make fewer mistakes. It does, however, mean that you’re putting all your eggs in one basket which may prove damaging should circumstances change and rental demand in your market take a turn for the worst. Remember all those empty student properties as a result of the pandemic?
Diversifying means spreading the risk around in the event of changing circumstances and potentially growing your investment portfolio in new and interesting ways. It does mean, though, that you may end up investing in a type of property where you’ve less experience than others and thus, may end up making mistakes which, can hurt your margins and the rest of your buy-to-let portfolio.
In the end, for portfolio landlords, making the choice between either option—whether to specialise or diversify your property investment portfolio—comes down to the three elements: experience, confidence, and calculated risk.
Carefully vetting potential tenants (or having a letting agent do it) is the best way to ensure the rent is paid on time, every time and that your rental houses won’t end up trashed. But there’s one key commandment on your end too: Be a good landlord.
Your tenants are likely paying a good portion of their incomes (or their parents’ incomes in the case of student properties!) to you, and so they’re entitled to a high level of service. Make sure that maintenance issues are dealt with rapidly, that communication between you is good, and that things like inspections are handled with sensitivity and respect for the tenant’s privacy and individual circumstances. Very importantly, do your research to gain an in-depth knowledge of the legal obligations which exist between landlords and tenants.
Being a good landlord is the best way to retain tenants which is, in turn, the best way to keep your growth plan on track. It helps you to minimise void periods and the expenses associated with finding new tenants.
Keep a constant eye on your figures and KPIs. These can be the canary in the coalmine which can tell you if you need to make either minor changes (like raising rents) or major ones (like selling houses). Failure to keep on top of cashflow will, at best, mean that your rental property will yield a lackluster return on investment, fail to provide the success you’d hoped, and preclude you from expanding. In the worst circumstances, it can mean you lose your investments altogether.
Don’t overstretch yourself. One thing to really avoid is cross-collateralisation, i.e., borrowing against the value of several properties at once. It means that if something should go wrong with one investment, you could have to sell multiple assets to pay off that debt. Even the juiciest property investment opportunities should be avoided if you can’t afford them.
Multi-million-pound buy-to-let portfolios aren’t built overnight. Overestimating what’s possible often leads to frustration among first-time property investors. As the cliché goes, property investing is a marathon, not a sprint, and to achieve success it pays to think in decades rather than months.
What kind of real-estate investor do you want to be? Are you going to manage letting the properties yourself or do you want to leave it to a letting agent? Although hiring a letting agent can eat into profits, it can save you the considerable time it takes to vet tenants and deal with maintenance issues. Should you decide to invest in rental homes further afield, a good letting agent is essential to managing your portfolio. Time, after all, is money.
If you do decide to be a hands-on professional landlord, remember: the rental market is a long-term investment; It isn’t a hobby and you won’t get the best return on investment if you treat it like one.
There will come a time when you wish to exit the rental market either because you’ve lost interest in the sector or because you feel the time is right to cash-in your buy-to-let portfolio. Perhaps your investment strategies included divesting yourself of your properties, which you originally bought for their potential for capital growth, in order to give you a comfortable retirement fund. Whatever the reason, such an exit from your long-term investment is inevitable and it’s best to plan for when it happens so that liquidising your buy-to-let portfolio is both orderly and profitable.
The property market is all about peaks and troughs and you should obviously aim to sell your assets when property prices are performing well.
So far, we’ve looked at some important tips about how to build a buy to let portfolio which should help you avoid making certain mistakes when it comes to investing and investment strategies. Vetting tenants and not financially over-reaching are some of the more obvious ways to avoid trouble, but what about some of the more specific pitfalls when it comes to looking at how to build a buy to let portfolio in the UK? Let’s take a quick look at some of the tax and regulatory issues.
Until 2020, landlords could claim significant tax relief on buy-to-let mortgage payments. Basic rate taxpayers could claim back 20% tax relief on mortgage interest payments, while those at the top rate could claim 45%. No more! Since April, 2020 there’s been a flat rate of 20% relief on mortgage interest payments. This probably won’t affect smaller landlords, and, in fact, it has leveled the playing field somewhat. It is, however, something to watch out for should you already have a small portfolio that you wish to grow.
Before April 2020 you could claim up to £40,000 Capital Gains Tax relief on any increase in the value of a rental property that used to be your main home. This is no longer the case and landlords should budget for additional Capital Gains Tax expenses if they’re planning on selling a property.
On the subject of tax, we’d strongly advise that anyone trying to build an investment property portfolio should seek independent advice.
This really shouldn’t be too much of a problem if you (or your letting agent) vets your tenants thoroughly. The government shortly plans to repeal Section 21 of the Housing Act which formerly allowed landlords to evict tenants with two months’ notice without needing to provide a reason. The repeal of Section 21 would mean that landlords would now have to go to court and provide a reason for the eviction, so it’s something to bear in mind. To help further mitigate the potential for problem tenants, it’s really worth drawing up a strong AST tenancy agreement.
As we’ve seen from looking at how to build a buy to let portfolio, investing in property can provide a handsome return on investment if it’s done right. The problem for many people is knowing how to get their foot on the investment property ladder and putting down a deposit if they don’t have much capital to start with. That’s where a mortgage broker like Coreco comes in.
We’ve written before about how remortgaging works, and it’s often the first step for people starting-out in the property business. If you’re keen on purchasing a rental investment, you’ve probably been carrying out daily property searches and making our mortgage calculator work overtime. However you choose to finance your investment though, a mortgage broker like Coreco can offer you the best, most up-to-date advice on your options. Homes are our business, whether it’s getting first-time buyers into their first apartments or helping professional landlords to build extensive buy-to-let portfolios. With more than 25 years experience and access to over 90 lenders, you can be sure that we can find you the best mortgage deals and the lowest mortgage rate to finance your buy-to-let investment.
Borrowing to invest in a buy to let property portfolio can be a minefield, so be sure, if it’s an area in which you don’t have much experience, not to go it alone. Even if you’re a seasoned portfolio landlord, we can offer the advice and borrowing options you need to keep growing your buy to let property portfolio into an ever more profitable investment.
Why not get in touch and let us help you build that real-estate empire?