How to Build a
Property Portfolio

It’s important to avoid biting off more than you can chew. An overly ambitious start could indeed cause problems with your cash flow – a crucial factor in keeping things sustainable. We would recommend starting with 1 or 2 properties and growing your portfolio from there. Therefore, be sure to select them carefully and make sure they are genuinely good investments.

To this end, try to buy in a location with fairly high rental demand (regardless of wider economic circumstances) and good demographics.  Middle-income earners are a good starting point in terms of a target market.

Some property sellers – particularly at auction – dispose of properties requiring various degrees of refurbishment. You must therefore budget accordingly.

An established course of action is to seek out affordable properties that are reasonably easy to renovate. Ideally, these should be situated in well-populated areas where rental demand is strong.

You’ll then need to figure out the value of the property (both pre and post-refurbishment) and what kind of yield it will earn.  The latter involves dividing the annual rental income by the purchase price.

Remember that the costs of being a landlord continue to rise. You will need the yield to be high enough to maintain the various overheads whilst earning a sufficient income (net rental profits).

When house hunting, keep an eye out for properties with opportunities to “add value”.  This can be something as simple as adding another bedroom through to applying for planning permission or Permitted Development Rights (PDRs) to extend the property and create extra floor space.

From ASTs to gross/net yields and void periods, you’re probably already familiar with some of the essential buy-to-let terminology. As you expand your property holdings, it’s worth understanding some of the more technical and financial concepts that govern larger real estate businesses.

Click on the box below which will take you to a glossary with such terminology – many of which have been brought over from the commercial and property development sectors.

With landlord legislation changing frequently, be sure to stay on top of all such matters as you grow your portfolio. These include:

• Making sure your properties are safe and comply with the various provisos of the Housing Health and Safety Rating System (HHSRS);
• Having annually updated gas safety (CP12) certificates. You must also have a minimum “satisfactory” electrical certificate renewed every 5 years;
• Your properties will soon need to have a minimum “C” Energy Performance Certificate (EPC) rating (2025 for new tenancies and 2028 for existing tenancies);
• Ensuring that tenancy deposits are protected in a government-approved scheme;
• Conducting the correct “right to rent” checks and providing every new tenant with the DCLG’s How to Rent checklist;
• Complying with all fire safety regulations.

Remember that landlords, by and large, continue to be a disliked bunch. There’s also growing evidence that breaches of the various regulations and laws come with increasingly severe punishment.

Related to the above, we generally recommend portfolio landlords run their operations under a Limited company – or as a holding of various Special Purpose Vehicle (SPV) entities. This is mainly because of Section 24 of the Finance Act 2015. This legislation effectively means that landlords with properties held in their personal name cannot offset mortgage interest against rental revenues when calculating income tax liabilities. Since the 2020/21 tax year, individual rental property owners can only claim a 20% tax credit.

Mortgage interest payments within Limited companies are treated as a business expense and have 100% relief against rental property income.

Other benefits of owning property in a company name include it being easier to reinvest funds.

There are also tax savings, especially if you come under the higher rate bracket plus you can mitigate the effects of inheritance tax and offset your life insurance costs against corporation tax.

Following on from above, should you choose to hold your properties personally, your principal tax liability will be on the income / rental revenues. You will need to complete an annual SA302 tax return.Note that there will also be a Capital Gains Tax liability if/when you sell your properties (based on how much extra equity there is relative to when you initially purchased them). Note that there are annual allowances (also known as exempt amounts), which effectively double if you own property with a spouse.

Where properties are held in a limited company, the principal taxes are Corporation Tax and Income Tax (on dividends or a salary derived from the company).

We strongly urge you to seek qualified tax advice before embarking on growing a portfolio.

As you expand, take the time to develop a systemised approach to assessing the financial viability of each property.  The more properties you look at, the more accustomed you will become to seeing what makes a good deal.There are also other costs to bear in mind when buying a property:

• Conveyancing fees and associated disbursements
• Auction or other forms of finance costs
• Additional property stamp duty charge
• Sourcing / marketing costs
• RICS homebuyers / condition report(s)
• Limited company set-up fee
• Lender’s valuation survey and legal fees
• Mortgage arrangement fee
• Debenture for limited company (SPV) property acquisition
• CHAPS transfer costs
• Mortgage brokerage fee
• Investor viewing / mileage costs
• Independent viewing costs
• Accountancy / tax planning advice
• The seller’s legal fee (a common practice in the We Buy Any House industry)
• New tenancy / rental management costs

Be sure to take great care when calculating the amount you plan to charge your tenants. Of course, your properties’ rental yields should surpass your expenses to make sustainable profits and stay liquid.

Related to this, you will also need reserve (or “slush”) funds to cover the inevitable issues that will appear.  Accountants informally refer to these as the three “Rs” – repairs, refurbishments and replacements.

Rent should also reflect the market value of the property and the appeal of the surrounding neighbourhood. Always take care not to price yourself out of the market.

Every time a tenant leaves, you will usually have to spend some money to refurbish the property. How much often depends on how long it’s been since the last renovation.

As a result, there may also be void periods that could drain your net cash flow – particularly if you have a few of your properties going through the same situation.

It’s also a good idea to build extra ways to generate revenue which can include:

• Flipping or trading properties to boost your “cash pot”.  Use these funds to reinvest or reduce the portfolio’s overall debt burden
• Sourcing properties / deal packaging / working with a homebuying company
• Building a lettings agency to manage your own and other landlords’ properties
• Developing existing properties to boost rental revenues (and the gross value of your holdings)
• Converting properties to Houses of Multiple Occupation (HMOs)
• Joint venturing and co-investing with trusted partners
• Diversifying into commercial conversions and/or other property investment / development sectors
• Having a job or engaging in consultancy work
• Finding freelance work in the industry or within another area of expertise
• Getting involved in rent-to-rent and/or service accommodation projects
• Lease options (leasing a building with the option to purchase it at a later date)

Most successful portfolio investors use buy to let mortgage finance to expand their holdings.If you are early in your property investment career, you may need to pay higher deposits (thereby borrowing on a lower loan to value). Some novice investors also cross-collateralise their investments with equity in their own homes or via equity from other business interests.

With every application, the lender will undergo due diligence checks of the property and your own financial situation. They will request certain types of evidence to prove that you’ll be able to keep up with the required mortgage payments.

For this reason, always make sure you have up-to-date bookkeeping and accountancy records (using specialist software like Xero or Quick Books).

As you grow, some lenders may also be willing to finance multiple purchases – or assist with portfolio remortgaging.

There are many professional landlords who prefer to diversify their mortgages – often “testing out” different lenders to see which ones works best. There are indeed lenders out there that have been known to “call in loans” – attributing clauses in the small print.  This happened to a number of portfolio owners and developers in the aftermath of the credit crisis in 2008.

Above all, sensible gearing (leveraging) should always be a priority. As you grow your portfolio, it may be an idea to sell some buy-to-let properties to boost the level of liquidity within the existing portfolio.

The fruits of your labour as you build your portfolio should be in the form of a notable increase in your income. Remember, however, that there is no rush. Keeping on top of several buy to let properties with little experience can be challenging.

It’s therefore wise to stick to buying similar property assets – such as single-family lets –  in the early days as you learn the ropes.

As you expand and develop the core skills of professional property investing, it’s well worth exploring further avenues such as:

• Houses of Multiple Occupation (HMOs) / multi-lets / studios;
• Mixed-use / commercial / industrial / semi-industrial property;
• Land sites / plots (with and without planning permission / Permitted Development Rights);
• Buildings that are normally considered unmortgageable – such as inhabitable or problem properties that need extensive refurbishment and/or structural works. Make sure these types of properties are acquired for the right price to factor in the full remediation costs and make an adequate return;
• Expand to different geographical locations (seeking out areas with strong capital growth prospects backed by infrastructure expansion and local development, for example).

When investing in property as an individual or corporate landlord, insurance should always be a priority. Make sure you shop around for the best cover that will adequately protect your portfolio. The ideal landlords’ insurance products should:

• Cover damage caused accidentally by tenants, as well as malicious damage resulting from vandalism or burglary
• Include buildings insurance (as a minimum) across your property portfolio
• Cover fire, subsidence and water damage (including plumbing problems and boiler breakdowns)
• Include liability cover in case of tenant injury
• Protect you against loss of rental income – including arrears and void period cover
• Cover your legal costs if you need to evict a tenant

Having the right kind of people renting out your properties can make or break the success of your business.For this reason, it’s worth running through the following checks:

• Work with good lettings agents registered with the UK Association of Lettings Agents (UKALA) and/or SafeAgent. Note that it’s possible to use agents for a tenant find only service (following which you will take over the ongoing management). There are also “no frills” services such as Open Rent which could considerably cut down your overheads;
• Maximise the chances of finding tenants by ensuring your property is marketed on Rightmove and Zoopla’s rental pages (as a bare minimum).  Good local lettings agents often have waiting lists of potential tenants;
• Check over any advertisements and make sure they’re well written;
• Make sure your properties are in good condition, clean and tidy to attract the best renters. You may have to step your game up if you’re operating in a competitive area;
• When it comes to what you should charge, local lettings agents alongside Rightmove and Zoopla’s rental pages (search within 1/4 mile) will give you a good idea. If you’re a member, tools such as Rightmove Plus are also useful;
• Always undertake background, credit and previous landlord checks. You need to be confident that they will pay rent on time and cause minimal trouble;
• Use a tenancy agreement that incorporates the latest landlord-tenant legislation to make sure your own and the tenants’ rights are sufficiently protected;
• Be welcoming, communicative and friendly.  Where possible, it can be a good idea to meet your tenants.

Should you decide to sell with tenants in situ, it’s vital that you make suitable preparations. The law stipulates that you should give tenants at least 4 weeks. Remember to make sure that they have another property to move to.

Much here will depend on what kind of condition your properties.  If, for example, you have invested heavily in improvements in recent years, your repair and maintenance costs are likely to be lower. As you get busier as a landlord, it often makes sense to outsource certain tasks to a property management company.  This will give you more time to focus on other areas of your business.  It’s also quite common for portfolio landlords to set up their own operations.

There are also very handy property investors’ workflow apps. These allow you to manage everything from one place including tenant communication, rental receipts (flagging anything that’s missing), scheduling gas / electric checks, maintenance / warranty updates, landlord insurance payments and tax.

This involves placing your property holdings under hypothetical scenarios to see how it copes under various degrees of financial pressure. These scenarios can include:

• Increased borrowing costs
• A future property crash or correction
• Lenders either calling in the loan or demanding a lower loan to value (requiring you to inject capital into the property business)
• Decreased rental receipts
• Sustained void periods
• High tenant turnover
• A rise in the number of properties within the portfolio requiring refurbishment
• Rising repair and maintenance costs
• Rising management costs
• Tenant rental defaults or other issues
• Tax changes
• Changing local demographics resulting in lower demand for rental properties you own

Once you have applied the various “worse case” possibilities – you can consider how you would potentially deal with each situation (or a combination of different issues).

Crucially, it’s worth saving some rainy day funds every month to handle such eventualities. Some portfolio owners sell properties that have gained equity over the years – with a view to achieving optimum performance over time.

Remortgaging properties can also be a good idea, but be aware of over-gearing and the risks that too much debt exposure can bring – particularly if you are early in your property building journey.

It’s worth remembering that holding multiple properties is a good way to balance out ongoing liabilities. Say, for example, you have to refurbish a property – you will still receive rental income from your other properties to keep things under control.

Investors should always keep their eye on the property market to work out where their money could go furthest.

Once you’re ready to invest again, look for properties with enough of an equity buffer.  Also, seek out properties (residential and commercial) where you can add real value.

Although things are much easier these days, dispersed properties are likely to require more delegated management.

Others landlords prefer to build a portfolio on local turf where they better understand the local rental and sales markets.

Whilst most high street lenders generally steer clear of buy to let portfolios, a number of funders certainly would be interested in building relationships. These include Precise Mortgages, Aldermore Bank and Paragon Group.

There is currently a slim chance of the government reversing current stamp duty rules* for second property buyers.  In terms of mitigation, much comes down to buying at the right price. It’s also worth noting that commercial property sales come with less punitive rates.

Above all, make sure you’re on top of all relevant tax legislation and work with good a good bookkeeper / accountant.

*see Wales, Scotland and overseas buyer stamp duty rules.

Make sure that every property you own is properly managed and maintained. Tenant satisfaction is paramount.

Have a good think about your overall motivations and goals.

Although there will certainly be headwinds as you grow, remember to think about the bigger picture.

Good luck!