If you’re seeking a great way to earn a secondary income, grow your pension pot and/or make property a full-time career, building a portfolio is a fairly well-trodden path to follow.
Whilst acquiring multiple properties requires a range of core skills from successful acquisition to tenancy management, when executed correctly, the result can be a phenomenal return on investment. The unquestionable benefit of future capital appreciation is another reason why many continue to pursue this strategy.
So, what does building a property portfolio involve?
In this article, the auctioneers at Property Solvers provide you with the key incremental steps to start and grow your property business. We also ask how you can expand your portfolio with £50,000 and even no money of your own. Finally, we explore how to make the correct moves and provide an essential glossary for property portfolio builders.
Step-by-Step Guide to Building a Property Portfolio
Of course, all investors have to start somewhere…
We’ll therefore start by offering tips for building your portfolio from the initial investment to owning multiple properties.
1. Start Small
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.
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.
2. Understand Property Portfolio Investment Terminology
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.
3. Continue to Familiarise Yourself with Landlord Legislation
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.
4. Structure Your Property Portfolio Business
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.
5. Understand Your Tax Liabilities
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.
6. Budget Carefully
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.
7. Multiple Streams of Property Income
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)
8. Financing Your Property Portfolio
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.
9. Stick to a Particular Property Type to Start
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.
10. Diversify Your Portfolio Holdings
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).
11. Get the Right Insurance
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
12. Find the Right Tenants
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.
13. Keep on Top of Portfolio Maintenance and Management
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.
14. Stress Test Your Property Portfolio
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.
How to Build a Property Portfolio with 50k
£50,000 is certainly a decent amount of money to get started with. Yet, whilst it may be tempting to buy as many properties as possible, the capital intensive nature of property investment could see your funds become depleted if you go too fast.
Much will depend on where you decide to deploy your capital. For example, you’re more likely to find more “bang for your buck” in the north of England where prices are generally cheaper and rental yields are better relative to London and the South East. Conversely, lower yield areas tend to see excellent capital appreciation.
Here are some other ideas and strategies worth exploring:
- Regularly check local auctions to see what’s available. Remember, there’s often a reason why a property is priced cheap at auction. Reviewing the auction legal pack in detail is crucial;
- Check out monthly updates on Property Auctions News which highlight some great properties under £50,000 across the UK;
- Search for properties under £50,000 on portals like Rightmove and Zoopla. Remember to set up alerts into your inbox. On Zoopla, you can also see which properties have been reduced the most;
- Related to the above, look out for older listings as you may have more chance of getting a good deal;
- Combing through auction databases – most notably Essential Information Group – can bring excellent results;
- Build relationships with estate agents who can notify you of properties that fit within your investment criteria;
- Work with direct to vendor sourcers with access to off market properties;
- Property forums and Facebook groups often have specific pages with deals for sale;
- Use social media to your advantage;
- Look for “DIY property advertisers” on sites like Gumtree;
- Speak with commercial estate agents who sometimes come across interesting opportunities, particularly if you can find properties with commercial to residential potential;
- Buy garages and rent them out;
- Invest some of the £50,000 into your own below market value property marketing strategies;
- Network with your local business community and let it be known that you’re looking for investment properties;
- Joint venturing could be worth exploring. Always make sure you partner with someone you trust and have all agreements reviewed by a solicitor;
- Related to above, build up your own funds by trading, flipping (after adding value) and/or sourcing properties for other investors.
- Look out for empty properties. You can find the address via the Land Registry and, provided it’s been updated, write to the owner direct.
How to Build a Property Portfolio from Nothing
Many people have the ambitions to buy investment properties but lack the large capital injections required to get going.
However, despite what may seem like an impossible feat, it is entirely possible to get there. It comes down to being creative with your approach and thinking about what potential skillsets you could bring to the table.
For instance, there are many cash rich but time poor investors out there. Could you offer to find suitable properties in return for an equity stake or share in profits? Or perhaps you have certain skills sets in the building trade or in areas such as marketing that you could use on a quid pro quo basis?
Other investors apply strategies used in the commercial property and development sectors such as lease options or controlling properties in other ways.
Say, for example, you find a property that has the potential to extend or build on, some sellers may be willing to sign a profit share option agreement on the basis of a successful planning application. In this rather crude example, you will get a share of the increased value through planning gain (with little capital input) and the seller benefits from a better price.
Making the Correct Moves as You Build Your Property Portfolio
Remember that building a successful property portfolio is a marathon and not a sprint.
If you already have 1 or 2 properties, you should not take any further steps until all of your existing investment properties are under control.
This means they are well-looked after with paying tenants and you’re in a comfortable (post-tax) financial position.
Once you are ready to invest in your next buy to let, make sure you always have enough capital to support your existing holdings whilst following these principals:
Continually Observe the Property Market
Investors should always keep their eye on the property market to work out where their money could go furthest.
Buy Properties Sensibly
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.
Location, Location, Location
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.
Work with the Best Buy to Let Lenders
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.
Remember the Stamp Duty Surcharge and Other Taxes
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.
Be an Ethical Landlord
Make sure that every property you own is properly managed and maintained. Tenant satisfaction is paramount.
Have a Long Term Plan
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.
Building a Property Portfolio Glossary
The following definitions are applicable to various areas of business finance, but we will be describing them in the context of larger scale property investment and portfolio building.
|The act of using more than one property asset as security (or collateral) to secure a loan.
|Debt Service Coverage Ratio (DSCR)
|A measurement of a property business’ available cash flow to pay ongoing secured finance (debt) obligations. A DSCR calculation should always be above 1 and anything below is a clear indicator of cash flow issues.
|Discounted Cash Flow Method of Valuation
|Larger and institutional property portfolio owners use this method to determine the value of a collective of assets based on future returns.
|The present value of a property portfolio is based on the future rental income cash flows that it produces. It is calculated by discounting these predicted future cash flows to the present using a discount rate.
|The rate at which the anticipated future rental income cash flows from the portfolio are discounted to the present.
The discount rate factors in the time value of money (i.e. the opportunity cost of funds) alongside the effects of inflation, market downturns as well as other micro/macroeconomic risks.
|Internal Rate of Return (IRR)
|The discount rate that makes the Net Present Value (NPV) of the portfolio’s rental income cash flows equal to zero.
|Hurdle Rate of Return
|The minimum required internal rate of return that the sale of a portfolio needs to achieve in order to be considered viable.
|Net Present Value
|This is the present value of future rental income cash flows minus the initial cost of acquiring the property portfolio.
|Net Operating Income (NOI) / Net Cash Flow (NCF)
|A key metric in determining profitability, Net Operating Income is calculated by deducting the property portfolio’s operating expenses from its gross operating income.
|The ratio of a portfolio’s Net Operating Income (NOI) / Net Cash Flow (NCF) to the current market value.
|Income Capitalisation Value
|The concept of the value of a property portfolio being equal to the present value of the income being generated.
|EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation)
|A commonly cited corporate finance metric, EBITDA can measure a portfolio’s overall profitability by providing a realistic picture of core cash flows and liabilities.
|Gross Asset Value
|Another way of saying the total value of the property portfolio.
|Net Asset Value
|The value of the portfolio minus the total level of mortgage debt secured against the portfolio.
|Portfolio Debt to Equity Ratio
|A metric used to assess the overall amount of leverage. A higher debt-to-equity ratio indicates that the portfolio is at more risk in the event of a housing market downturn.
|Property Portfolio Debt Structure
|The way in which the property portfolio is financed. Typically this will be a combination of mortgage debt and injected equity.
|Blended Portfolio Loan to Value (Gearing)
|A measure of the amount of total debt relative to the value of the property portfolio.
|Property Portfolio Management
|The continual process of dealing with the day-to-day of owning a property portfolio. This involves everything from refurbishment and finding tenants to handling problems that inevitably occur.
|Property Portfolio Mortgage Finance
|The use of secured finance to support the growth of a property portfolio business. In most cases, unless the housing units are in the same building, each property will have its own funding arrangements.
|Weighted Average Cost of Capital (WACC)
|The average cost of funding the portfolio as a whole. This usually involve interest only mortgage payments and other debt servicing costs (such as via joint venture partners).
|Property Portfolio Stress Testing
|As discussed above, portfolio stress testing involves artificially placing pressures and vulnerabilities to develop strategies to mitigate the effects accordingly.
|Property Portfolio Sensitivity Analysis
|A similar concept to stress testing, sensitivity analysis is used to hypothetically assess the impact of key variable changes on a property portfolio.
|The running gross (and net) yield applicable to the gross (and net) income should the portfolio ever be sold.