How to build a rental property portfolio
Are you looking to build a rental property portfolio?
With rents in the private sector continuing to rise at record rates, starting a portfolio could prove to be a shrewd financial move.
Growing from a single-property landlord into one with several assets is a long-term project which requires time, commitment and money.
At Gro Residential, we understand that making your first investment can often feel a bit daunting. But we believe following a few simple steps can help you avoid costly mistakes.
Here’s our top 12 tips to building a rental property portfolio that’s sustainable…
Set an end goal
Before arranging any viewings, it’s important to know why you want to invest in property.
Do you want to enjoy increased capital value when you sell? Are you keen to become a successful buy-to-let landlord? Or would you like to do both?
Knowing your financial aims will not just influence your first property purchase, it will also determine future investment decisions and how you build your portfolio in the long term.
Start off small
There’s nothing wrong with being ambitious, but it pays to be sensible and start off small because this will minimise the potential risks you face.
The property market is known for being volatile. So are interest rates. If you’ve only got one property to worry about, you’ll be able to learn slowly before gradually building a portfolio over time.
If you’re going to manage your first property yourself, it’s probably wise to choose one close to where you live so you’re always on hand to deal with any issues.
Do your research
Before buying anything, do your research and find out what type of properties are most in demand in your target area. It also pays to know what type of tenants you might attract and how much they’re willing to spend on rent each month. Otherwise you could end up owning a nice property which won’t rent out, a common mistake often made by first-time investors.
Set a budget and stick to it
If you’re going to build a rental property portfolio which makes money you need to be financially shrewd. No matter how much you like a property, do not go above your maximum budget.
It’s also a buyer’s market so you should never offer the asking price. The worst that can happen is that you’re turned down. Start low and let the seller negotiate the price up.
Create a positive cash flow
In our experience, the main reason why single-property landlords don’t buy more lettings is because they cannot afford the repayments.
You can only do this by making sure the rental income covers your mortgage payments and other outgoings, whilst also providing a reasonable return. The sum you receive after all expenses have been paid can then be used to reinvest.
Adopting this approach effectively means that your properties are paying you to own them. To sustainably buy and own more than one property (and continue to purchase) you need to follow this model to create a positive cash flow.
Always think about tenants
For buy-to-let investors, the tenant should always be at the forefront of their mind when making any decisions because a satisfied tenant is more likely to lease a property in the long-term. Not only will this help to maximise the length of a tenancy, it will minimise void periods without rent and allow you to bank a regular income.
Stress test
The best way to guard against rising costs and mortgage rates is to stress test your business model. Make sure you can still turn a profit even if the worst was to happen, such as a property being empty long-term or changes to legislation.
In 2018, changes to mortgage interest relief dramatically increased the amount landlords had to pay in tax. However, those who had a strenuous stress testing process in place were largely unaffected.
Make sure you can always service your debts. Try not to borrow against the value of multiple properties at once (known as cross-collateralisation) or you may have to sell more than one of them to pay off just one loan.
Renovate to accumulate
Improving a property - and its value - is a great way to help you acquire more property for two reasons:
- It often allows you to increase the rent.
- It usually increases your equity.
Properties which have been a bit neglected usually get put on the market for a reduced rate so they’re easy to improve with a few simple renovations.
Even a quick lick of paint and a new carpet can make an amazing difference to a property’s market value.
Work with tradesmen you trust
Most successful landlords know a great team of tradesmen. Should any problems need fixing quickly, it’s comforting to know you’ve got some good, reliable tradesmen you can trust to help.
Get a good agent
If you don’t want the stress and hassle associated with being a landlord, it’s definitely worth getting a good letting agent.
At Gro Residential, we work hard to develop a close working relationship with all our landlords because we believe this helps make life easier for them and their tenants.
Not only do we deal with everything on your behalf, we also offer expert advice when it comes to building a property portfolio, notifying you first about suitable investments before they go on the open market.
If you’d like to find out more about working in partnership with us, please get in touch or call 01482 566057.
Ignore value – and focus on yield
Focusing on property value instead of yield is the biggest mistake that first-time investors make.
As most investors already know, the ‘yield’ of a property is the annual return you’re likely to get on your investment. It’s calculated by expressing a year’s rental income as a percentage of how much the property cost to buy.
Put simply, there’s no point having a property empire worth £100m if you have huge mortgages on all those houses and a negative yield. In reality, you don’t actually ‘own’ anything. You’d be better off with one house worth £110,000 delivering a yield of 5 per cent (£5,500 in rent each year).
In short, it’s always better to look at how much your investments are bringing in, not what they’re worth on paper.
Stick to what you know
When the rental income starts to flow, don’t grow an ego. Stick to what you know.
Doing this will allow you to become a specialist in your specific area, a certain type of tenant (families or students) or a particular type of property.
If you’ve got a business model that works, don’t try to reinvent the wheel. There’s actually nothing wrong with repeating the same winning formula time and again.
Want more expert property advice?
If you’re keen to build a sustainable property portfolio in Hull or the Yorkshire region, Gro Residential can help you take the next step - call 01482 566057 to find out how!
