Building a property portfolio can be an ideal way for those with cash to invest to create a long-term source of wealth for them and their families. Property investment has the advantage of long-term gains despite short-term dips in the market, as can be seen after the crash of 2008. Despite a sluggish residential property market over the last few years, 2014 saw a 7.1% rise in UK property prices and a surge in demand for rental properties, partly as a result of high levels of foreign investment in the London property market and partly because of UK Government initiatives such as ‘Help to Buy.’ The future looks positive for property investment, with house price growth projected to average 2% a year in real terms between 2014 and 2025 and significant annual rent increases because of a chronic housing shortage across much of the UK.
If you are interested in building a property portfolio, you should consider the goal of your investment. Do you want to build a lump sum in the long term or do you hope to benefit from ongoing rental yields? It is important to decide whether your portfolio will be an additional income stream to supplement your current job or future pension, or whether your investment portfolio will replace other pension arrangements? If you are unsure, arrange to speak to an independent financial advisor. Answering these questions will help you to decide the size of portfolio that’s right for you. Bear in mind that a single property is unlikely to bring a large capital gain or rental yield on its own and that each property carries a risk of losing money when it is unoccupied or if house prices fall. Having more than one property spreads the financial risk so that you are less affected if one of your investments does not perform well.
Spreading the Risk
Another important aspect to think about is how much money you have to invest. Do you have a lump sum that you intend to use to buy a property or properties, such as a legacy or other cash? Are you planning to remortgage your home and use the equity? If you are thinking of remortgaging your current home to re-invest the equity, think carefully about the amount of risk that you expose yourself to and whether you might be able to afford higher mortgage payments if interest rates rise, because it is possible to lose your home if your gamble doesn’t pay off. Speak to an independent financial advisor if you are unsure. However, if you have a cash sum to invest over time, consider buying several cheaper properties in different ‘up and coming’ areas rather than one expensive property in a highly desirable area. If you have a limited sum for investment, buying a number of cheaper properties spreads the risk, as does buying these properties in different ‘up and coming’ areas, so that if one house or area performs badly this is not a disaster for your overall investment.
Careful Research is Essential
Remember that when investing in property you make money when you buy the property rather than when you sell it. Do your research carefully to choose a location within your budget where demand is high or is set to rise and (if possible) find a property with ‘motivated sellers’ (i.e. people who want a quick sale, such as house repossessions). This will allow you to make an offer below market value. The savings you make will either enable you to renovate the house ready for letting to tenants or will increase your capital when you sell the property in the future. If you add value to your property through renovation this should increase both the rental yield and capital growth of the property.
Remember the Cost Involved in Becoming a Landlord
When you let a property to tenants you will be responsible for its maintenance, as well as for fire safety and gas certificates etc. If you decide to employ a letting agent, you will have to pay property management fees, and you will need to allow for these costs in your investment budget. If you manage the property yourself, you may spend quite a lot of time and money finding suitable tenants, arranging credit checks and tenancy agreements, as well as contacting tradesmen to sort out maintenance issues. This may be an issue if you have a full-time job or demanding family commitments. In addition to all of this, remember that you will have to pay income tax on all rental income (after deductions for maintenance costs) at the appropriate rate, as well as paying capital gains tax when you sell the property.
Consider a Diverse Investment Portfolio
Many property investment companies may promise their investors high rental yields and capital growth for rental properties, but the reality could be different. Once rents are added, a landlord with a buy-to-let property could expect an average real return of 3% a year before tax but after running costs between 2014 and 2025. This could mean that property investments alone provide a low rate of return. According to accountancy firm PwC, over the next 10 years the return from a property investment is likely to be similar to that from a 50/50 mix of index-linked gilts and equities.
If you do invest in property, start with one residence at a time so that you can learn the business gradually. You can develop the property, learn the ropes and gain important business contacts (such as solicitors, tradesmen and surveyors) as you go. Your first property will also help you decide how involved you want to be with your growing property portfolio as you will come to understand how much time and effort is involved in developing property and being a landlord. If finances allow, you could start with a multiple-occupancy building and live in one apartment while letting out the other flats to tenants. This can allow you to keep a close eye on your investment and can mean that over time the rental yield will allow you to buy another property as an investment or primary residence.
Run Your Property Portfolio as a Business
It is very important to run your portfolio along sound business principles, with cash flow projections, loan to value measures and rental yield calculations. If you are unsure what this all means, ensure that you employ a competent accountant to manage your affairs. As your property portfolio grows, financing becomes more complex, but you will also have more flexibility in your investments. Once you are in a positive cash position more options are open to you, especially when it comes to buying property sold at auction. This can give you an advantage when looking to buy property below market value, and you will also be able to access special loans and mortgage deals from banks. With good financial advice and management, you should be able to build a solid portfolio that gives you some financial security.