This information should not be interpreted as financial, tax or legal advice. Mortgage and loan rates are subject to change.
Building a property portfolio is an ongoing process, and to be done right takes time, but with dedication it can be profitable in the long run – providing you with a relatively passive income.
You will need to have a clear target you want to meet, a practical step-by-step plan of how to get there, seek professional advice, choose properties and time each purchase correctly (although make sure to not get stuck waiting forever on this step).
Below is summary of the steps you will go through:
- Work out your targets and plan your strategy
- If you are using a mortgage, find out how much you can borrow
- Find a property to buy and buy it
- Get the property ready to rent
- If you want a letting agent, find and appoint one
- Find a tenant
- Let your property
- Manage your finances and property maintenance
- Plan how you will raise your next deposit/buy your next property
- Repeat step 3-9 until you have fulfilled your targets
This guide will take you through the stages of how to build a property portfolio in more detail.
- What is a property portfolio?
- What are your targets?
- Planning your strategy
- Find out how much you can borrow (if you aren’t buying with cash)
- Finding a property and buying it
- Getting the property ready to rent
- Manage your finances and maintain your property
- Raising a deposit for your next investment
What is a property portfolio?
A property portfolio is a group of properties owned by either an individual or company. This group of properties is held with the intention of generating income, and can be done either by the appreciating value of the properties over time, by renting out the properties to tenants or, most likely, both.
The two broad categories of property are either residential or commercial, however commercial can include retail, office space, industrial etc. For more information, read our guide to commercial property types.
Be aware though that whilst there are lenders who will offer first time buyers a buy to let mortgage, commercial lenders will look for industry or property investment experience before they will offer you a commercial mortgage.
Having clear targets means both success and failure are well defined. You want to know when you’re on the right track, and when you are not.
Short-term targets might be ‘I want to buy my first property within the next 6 months’, mid-term targets could be ‘I want to raise a deposit for my next property within 2 years’, and long term targets might include ‘in 6 years I want to have 4 properties under my belt’.
These targets will help you plan how to achieve them and if they are realistic. Discovering if your targets are realist will require research.
Aspiring property investors may be enticed to venture into it alone, without prior experience and without getting the help of someone who has been successful in building a property portfolio.
A better approach would be to educate yourself, by drawing insights from experienced individuals and actively seeking advice.
In the age of the internet, you can completely immerse yourself in all the educational content it has to offer. Watch videos, listen to podcasts, read articles, keep up with news updates, and soak in all the knowledge available – choose your sources carefully, if something sounds too good to be true, it generally is.
You need to know the positives and the negatives, so plan for any challenges you may face.
Consult a reputable letting agent who possesses extensive knowledge in the field - they can provide valuable guidance and insights into the rental market.
Additionally, seek advice from a trustworthy mortgage broker to better understand the costs of borrowing to invest in property.
In this age of information abundance, make use of resources to delve deeper into the subject of letting. Your life-stage and reason for wanting to build a property portfolio are likely to influence your strategy.
You might never have owned a property before, but want to make a passive income from rent whilst you live at home rent-free with parents.
In this example, the biggest barrier you face may be raising a deposit. Buy to let property requires a higher deposit than you need for a residential mortgage (you will need at least 15% of the property value, but more likely 25%).
By contrast, you may have built up savings and want to invest to generate profit for a better lifestyle than you currently have. Or, you may have retired and have a pension pot you want to invest. In these circumstances the deposit may not be an issue, but how to put your money to best use is the biggest challenge. Your attitude to risk may differ too.
It is important that your initial investment carries minimal risk, to get you off to a sound start. Buying a property that is a straightforward home suited to a range of people, needs minimal renovation and is located relatively near you can help.
The proximity will mean you are more familiar with the area, tenant types and needs, and can access the property easily if you need to.
Bear in mind that if you are investing in a rental property as the first property you have ever owned, a buy to let mortgage lender will want to be confident you have no intention to live in it yourself. So, whilst it is practical to buy near to where you live, you will need to demonstrate a clear intention to remain living elsewhere (e.g. in a home you own, with parents, or in a rental property) and not move in.
Calculating Return On Investment (ROI)
Remember when you are buying a property, the potential rent needs to be profitable. Ask the letting agent what rent you can expect to make from it.
The upfront cost of the property will affect your overall return on investment, which is broadly calculated as follows:
Annual rental income minus annual costs divided by purchase price, multiplied by 100 = Return on investment
|ROI with a mortgage
|ROI without a mortgage
|Annual costs (inc. mortgage payments)
|Annual costs (no mortgage payments)
|Net annual profit
|Net annual profit
|Property purchase price
|Property purchase price
This demonstrates how, whilst taking a mortgage comes with risk, it can be more profitable to use a mortgage to achieve a higher ROI. This is good news if you cannot afford to buy a property outright, and may influence how you invest a pot of cash if you could buy outright.
Rather than buy one property with your cash, you could buy two or three using mortgages, which could achieve a higher return on investment if you can turn a profit. For example, rather than putting £200,000 of savings into just one property, you could put it into four:
|ROI when splitting a £200,000 investment across four properties
|Annual costs (inc. mortgage payments)
|Net annual profit
|Property purchase price
|ROI per property
In this scenario your net annual profit per year is £17,600, so in three years you would have £52,800 which could go towards buying another property.
You might stagger these purchases, to get some experience in letting property first.
Of course, making a profit is not guaranteed. This is why you have to monitor your costs and income carefully. If something happens which stops you being able to pay a mortgage (e.g. a tenant stops paying rent, or a tenant moves out and you struggle to find another quickly) a lender reserves the right to take possession of the property to cover the debt you owe.
This is why you will see the words “Your property may be repossessed if you do not keep up payments on a mortgage” associated with mortgage borrowing.
Forecasting profit and planning for your next purchase
If you are relying on profits from rent to raise your next deposit, you can create a forecast of how long it will take, given a target sum of money. You should factor in all costs – including unexpected ones, such as ad-hoc maintenance, e.g. if the boiler breaks at your property, replacing it will take a big chunk of money that may set back your plans.
Once your initial property starts generating a profit, such that you build up a pot of cash for reinvestment, you can contemplate expanding your portfolio by buying more properties.
Having a bit of experience in property at this point, you might look at ‘flipping’ houses to make money more quickly to reinvest. Read our guide on flipping houses here, but bear in mind this is quite a different discipline and may not be as straightforward.
If you are just starting out in property and your annual income from rent means your next property deposit is many years away, you can assess your other options.
It might be that you can save hard from employment income to help save towards the next deposit. This may require sacrifices in other areas, but by getting the numbers together and seeing what is involved you can make decisions to suit you.
Buying your first rental property
If you have no prior experience in property investment, it is sensible to begin with a modest approach and gradually grow from there.
Even if you own your own home, but are getting started with building a property portfolio, this is still a sensible tactic to reduce risks from any initial bumps in the road.
Instead of purchasing multiple properties simultaneously, which may not be possible from a financial perspective anyway, you could mitigate risk by starting with one – for example, this could be how to build a property portfolio with £100k or less.
By starting with one property, you can go through all the steps involved with renting property, learn from any mistakes you make, get a feel for what dealing with tenants is like, build relationships with contractors for property maintenance, establish if you want or need a letting agent (which can reduce a lot of the work and stress, but is a cost that will detract from your profit) and so on.
Find out how much you can borrow
Before you can go out looking for a property, you need to know how much you can spend on buying it, if you are not buying outright with cash. If you are buying with cash outright, you can skip this section of the guide.
A specialist buy to let broker can help you with this. If you speak to someone who knows this part of the property market specifically, they are going to give you the best possible picture of what you can borrow, based on a wide range of lenders which represent the UK marketplace.
With a wide range of choice you also stand the best chance of securing the most cost effective mortgage deal possible for your circumstances.
With a buy to let mortgage, you can borrow on a capital repayment (you pay back the lump sum you borrow and the interest charged) or interest only basis (you just pay the interest for borrowing the money, at the end of the mortgage term the lump sum will be owed back to the lender).
The route you take will impact your monthly profits, and whether you own the property outright at the end of the mortgage term. On a like for like basis, an interest only mortgage payment will be less than a capital repayment.
What is the maximum you can borrow on a buy to let mortgage?
Whilst you can get high loan to value buy to let mortgages, where you put down just 15%-20% as a deposit, you may need a bigger deposit to open up a wider choice of (and lower) mortgage rates.
Higher loan to value buy to let mortgages typically come with higher interest rates and monthly costs, which will reduce your yield (the amount you make after costs are paid). With a higher deposit (25% or more) you could achieve a lower monthly cost and therefore get a better yield.
This becomes particularly important if you want to raise your next deposit from your rental income.
Even if you intend to raise future deposits from other sources (e.g. employment income) most landlords look to make a profit from rent.
Growth in the value of your property is another way to make money from a property portfolio, but that typically takes many years, so is not a fast method to generate your next property deposit. For more tactics on this, read our guide “How to make money from buy to let properties”.
To actually get your hands on any money you make this way requires you to remortgage and raise money from the capital in the property once (and if) it has increased in value, or to sell it.
We have written a separate guide on this subject, here: “A limited company or personal buy to let – the right choice”, it hinges on tax implications, so this guide will help you when you come to talk to a qualified tax professional for advice.
Finding a property and buying it
There are a number of mainstream property portals you can use to find property for sale. With a budget in mind you can start to refine your search.
Think about who you want to rent to. A family? A couple? Young professionals? Students? Weigh up their needs, many will be common to a lot of people but some will be more specific.
Consider number of bedrooms, outside space, transport links, proximity to retail and food shops, leisure facilities.
When you view a property, check the overall condition, look for signs of damp, establish whether the property has good central heating , cavity wall insulation, and double glazing. Assess the property with your tenants needs in mind.
Don’t pick a property based on what you would like if it were your home, because it is an investment only.
Negotiating a price with return on investment in mind
If you are buying with a mortgage, demonstrate your ability to move quickly to buy a property to an estate agent and their client, by getting what is called a ‘lender decision in principle’ (DIP) also called an ‘agreement in principle’ (AIP).
This is a document that says you have a lender prepared to offer you a mortgage. It will show you what the monthly mortgage cost will be. Use this to work out how much rent the property you buy needs to make to generate a profit.
You can get a DIP/AIP from a mortgage broker like us. We will go through your needs and circumstances to get all the information we need. We use this to match you to the best mortgage we can find from amongst all the lenders we work with.
If you have a house of your own, you may be familiar with this process. It’s often called a factfind by mortgage advisors.
Once we have identified the best possible deal, we ask the lender to assess all the information we have taken from you and decide if they are likely to offer you a mortgage, based on those details. If yes, they issue a DIP/AIP.
Getting the property ready to rent
As a landlord you have a legal responsibility to ensure a rental property you own is fit and safe to live in. This involves making sure gas (if applicable) and electrical checks are conducted by a qualified professional and you have a Gas Safety Certificate and Electrical Installation Condition Report (EICR) to supply to the tenant and retain for your own records.
You need to provide smoke and carbon monoxide alarms in the property to help keep tenants safe.
You need to provide potential tenants with the Energy Performance Certificate for the property – this means if a tenant expresses an interest in your property you should provide this straight away, before they make a decision on whether or not to let your property.
The water supply to the property must be in good working order and not at risk from Legionella.
Check any blinds in the property do not have looped blind cords, as they are a risk to life, especially to children.
The government provides a guide on “How to let” which is available to download from the gov.uk website.
Should I use a letting agent?
Letting agents typically charge you a percentage of the rent you receive as their income. A letting agent can help you stay on the right side of regulations and eliminate you getting involved in the day to day management. But, the cost will impact your profits.
Letting agents will have relationships with trusted contractors for maintenance work, electrical, gas and energy performance checks. Given the volume of work the agent will be passing to these parties, you should expect fair pricing, but always check quotes you get until you are confident.
You can choose the services you want to pay for from a letting agent, these are typically:
- Let only: The agent advertises the property, manages viewings, does tenant vetting and checks, produces the Tenancy Agreement, completes an inventory of the property to establish its condition and contents before the tenant moves in (including photographic evidence with written notes) and arranges for the tenant to move in. You must then do everything else.
- Let and rent collection: This includes all the above, plus managing the collection of rent (and chasing late payment) and payment to you.
- Fully managed: This involves all aspects of managing your tenancy, which in addition to the above includes regular property inspections, legal obligations like gas and electrical safety (associated costs from third parties are typically deducted from the rent, if the rent covers it), dealing with tenant enquiries and maintenance or repair issues, handling rent renewals, any rent increases and check-outs.
If you do choose to appoint a letting agent, meet a few and compare them. You want a company who are firm but fair and who will protect your interests, whilst keeping good tenants happy.
Watch out for agencies who have built a poor reputation, don’t pick someone who is known to constantly force tenants out to charge you another finder’s fee, or who don’t provide a good service to tenants. By contrast, get an understanding on how they will deal with problem tenants. Recommendations from other landlords can help you choose one.
Finding a tenant
If you use a letting agent this job could be taken out of your hands. Certainly it will smooth the way for marketing your property on mainstream property portals.
However, if you are going to look for a tenant yourself, the target is to find someone who:
- Can afford the rent and will pay promptly
- Will respect your property and keep it in good order
- Will not cause you or the neighbours of your property any undue problems
It can be very hard, if not impossible, to be sure any tenants will tick all these boxes, but an agent will have experience of warning flags. Getting references from employers to establish employment and asking for recent bank statements to demonstrate rent is affordable can help with point 1.
You could take payslips as evidence of an income to pay rent, but a bank statement will show other outgoings to demonstrate the rent is affordable, which payslips won’t do in isolation.
References from a previous landlord or letting agent can help with point 2 and 3.
You might think of playing it safe by taking a tenant you know, but remember, if you have a buy to let mortgage the tenant cannot be a member of your own family.
Let the property
You will need a tenancy agreement that sets out the terms of the tenancy. The government provides a template with guidance notes on how to produce an Assured Shorthold Tenancy Agreement here.
A letting agent will have a template you can use ‘off the shelf’.
You must check the tenant is 18 years old or over and has the right to rent a property. Find information on the right to rent on the gov.uk website.
You are allowed to request a deposit from the tenant to cover the cost of repairing any damages or unpaid bills if and when they choose to leave your property. However, this money remains theirs and must be placed into a government approved tenancy deposit scheme, follow the link for details.
If you aren’t using a letting agent or third party to do so, take an inventory of the property making detailed notes and taking clear photos of all rooms in detail. You and the tenant should sign and date the document to show agreement on both sides of its accuracy.
Manage your finances and maintain your property
Keeping accurate financial records will help you establish if you are achieving your profit goals.
It can help to separate personal finances and rental finances by having a separate bank account for your property/ies.
Don’t overlook your tax obligations. You may have to pay tax if you let out property. You can find details about this on the UK government website, but if you are unclear, speak to a qualified tax professional.
You might opt to get an accountant to help you on an ongoing basis with tax matters and tax returns.
As in life, keeping savings aside for emergencies is sensible. Unexpected costs can crop up with rental property and it is far less stressful to have the money to hand to cover it as you are obliged to resolve issues with a property in a reasonable timeframe. Your relationship with your tenant will benefit from doing so too.
Raising a deposit for your next investment
Over the medium term you might pay for your next deposit by using:
- Income from rent
- Savings you have set aside
- Employment or pension income
- Collaborating with another trusted party who can help
Clear financial records from your existing property will help you establish what you can generate from rent.
Over the long term, you may find your existing property(ies) increase in value, so you can remortgage to release that equity as cash to reinvest, or use that and rental income or other savings in combination to do so.
How long does it take to build a property portfolio?
How long it takes to build a property portfolio is influenced by a huge range of factors, but the biggest one is money. You can’t buy several properties without having the money to do so.
The physical process of buying a property takes some time, if you are buying in cash it takes less time than if you buy with a mortgage – which takes around 4 months on average. This may impact how long it takes to build your portfolio. If you get to a point where you are confident and have the money to do so, you can buy multiple properties at the same time.
You may choose to make sacrifices to your lifestyle and spending in order to plough every penny you have into raising money to buy property, with a long term view that eventually it could generate you a significant passive income. But, circumstances may not allow you to do this.
Accurate planning will help you find the answer to a lot of questions, but mortgage interest rates and house prices that are out of your control will also impact your plans. It might be wise to draw up a best, worst and medium case scenario to manage your expectations.
How can I build a property portfolio quickly?
If you are keen to act fast, you might be asking yourself the question, ‘How can I build a property portfolio quickly?’. As mentioned above, flipping property (buying a run-down property, doing it up and selling it for a profit) allows you to get cash back out of a property more quickly than waiting for a single property to generate monthly income from rent.
Flipping property is one tactic that could help you raise funds more quickly, to then buy and let out a number of properties to make money from the rent over the longer term. It comes with risks though is far more complex than just buying a property and renting it.
Over time you might blend flipping properties with letting properties, depending on which are more profitable for you and the time you have available to renovate properties.
The more properties you own, the more rents you will receive. If all properties are profitable (i.e. your rent is more than the costs associated with the property), that should mean your overall profit grows more quickly than with fewer properties.
This would mean that you may get to a point where a number of favourable outcomes come together to allow you to make your next purchase multiple properties.
For example, say you own three properties, all are making a profit on rent and all have increased in value. With a pot of cash from profits and equity (equity is the percentage of the property you own, as opposed to the bank who lent you the money to buy it) in each property, you could remortgage all of the properties to extract the equity as cash, and put that money together with your rental profits to buy another three or more properties (the number of properties you can buy will depend on the amount you get together in cash to use as deposits).
Making a profit is not guaranteed though, so building a property portfolio is not ‘easy money’. You should be thinking of a strategy that will play out years, not months.
Do not forget that you could lose money when you invest in property, and if you borrow money from a lender and cannot keep up with payments on the loan the lender could take possession of the property to cover your debt.
Commercial Trust provides expert buy to let mortgage advice, speak to us today.
Whether you’re adding another property to your portfolio, or just starting out with the first – you may need expert mortgage advice to help you get the most competitive rate possible.
It may be the make or break for whether that particular property returns a profit; it’s important to get it right!
As a specialist broker, we have a team of mortgage advisors that have access to a wide range of lenders, so give us a call or enquire on our website and we’ll get back to you.