Property investment portfolios have becoming increasingly popular and more and more people, from whatever background, are investigating how they can get on the property ladder and turn rent into income.
In this article we will explain how you can build a property portfolio of rental properties and what to consider when making investment decisions in the property market.
Planning and Strategy
The first thing you need to do before purchasing your first property is research. You need to understand how your property business might work, the relevant costs involved and ultimately where a good investment might be.
After your research and planning you want to have the answers to the following questions:
- What is my maximum budget and how much can I borrow? Should I partner with someone else to make the purchase?
- Which banks should I use for finance?
- What type of property should I buy?
- Should I renovate a property or buy it ready to go?
- How should I structure my investment?
- Where should you buy? Will I need to use a property sourcer to assist in purchasing or a letting agent to help with property management?
Once you have made a plan, you will likely want to incorporate a company for your property business.
Once you have answered the questions above you will now want to start devising your strategy for your rental property portfolio to ensure that you make good investment decisions. You will want to decide what type of property you will invest in. For example, will it be a family home, a student rental or for young professionals? On this basis, you then need to consider whether a flat or a house is more appropriate as well as other amenities such as whether you should purchase a property with a garden, garage or parking facilities.
The decision on what type of property to buy ties into your decision on where you want to make your first purchase. When deciding on where to purchase you should of course consider the rental yield and local property market and demand but you should also take into account reasons why you are choosing to start your portfolio. For example, if you were hoping to personally complete renovations on the property but have a full-time job, a location near you might be more appropriate. Similarly, when considering where to purchase you need to consider more than the property purchase price and rental yield. For example, if the property is located elsewhere will you need to pay for property management services and is there a demand for rentals in the area?
Paramount to your general strategy will be your financial strategy and it is prudent to develop the two in parallel. When considering financing your first property in your portfolio you will want to have an idea of how many properties you want to purchase in the near future and how you intend to finance them. You need to establish your short term and long term goals.
Property Purchase Price
The first thing you will need to take into account is the amount of finance you can provide for a property. You will need to consider how much money you can put towards a deposit and how much money lenders will provide you. When investigating buy to let mortgages you should consider the interest rates and cost of mortgage payments (repayments). When calculating your finances for your first purchase you should also ensure that you take into account additional costs that you will incur when purchasing a property such as stamp duty, legal fees and any furnishing, decorative or renovation costs. When you have found a property that fits your criteria you will also want to make sure that the property value is appropriate for the local area and the general market value.
Rental income is taxable and you therefore need to consider how this will affect your rental yield from the property. Note that you are also required to keep records of your cash flow under the Companies Act 2006.
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Another expense that you will want to consider when working out your finances and property strategy is whether you will need any licences. For example, rental homes that contain multiple people from different households (HMOs) require licences that are issued by local councils. Learn about HMO licensing.
You also need to take into account costs you will incur once you have purchased your property. You will need to take into account property sourcing fees, letting agency fees and renovation costs where applicable.
Once you have secured a property and made any necessary alterations, you will then want to make it a rental property by taking on tenants. Entering the rental market for first time landlords can be overwhelming but when intending to create a property empire it is important that you get your tenancy affairs in order at an early stage. You want to ensure that you have robust agreements that are tailored to your situations, such as houses in multiple occupancy, and that you have clear management stratergies in place that can be improved upon and duplicated for your next purchase. Learn how to find tenants in 7 steps.
Long term plan
Whilst it is often advised that you start with one property, you ultimate goal is to create a portfolio of successful lets that can hopefully become a source of passive income for you. In order to do this you need to devise a longer term plan for when and how you will invest in future property. For example, you might intend to start diversifying your portfolio with different properties, in different locations, to give you confidence on your return on investment (diversification). Similarly, you might want to consider longer term remortgaging stratergies and how you can avoid capital gains tax but using your returns on new purchases.
For your portfolio to grow quickly and securely you need to have direction on how this will happen. When making your first investment you will want to ensure that everything is done correctly the first time around to reduce expenses down the line. Creating lawyer-approved agreements can be costly and it can be tempting to download free templates online. However, this process is risky and unnecessary thanks to contract management platforms like Legislate. Legislate allows to tailor the essential agreements to grow your property business such assured shorthold tenancy agreements, letters and notices. To create a lawyer-approved contract for only £9.95, sign up to Legislate today!
The opinions on this page are for general information purposes only and do not constitute legal advice on which you should rely.