How To Build A Property Portfolio

Property investment, and in particular, making money from buy-to-let investment, has become increasingly popular in recent years, as people become more ambitious and find that the property market is an accessible means through which to make money.

It may be that you are looking to start a new career, you have savings you wish to invest, or maybe you have come into money from an inheritance? Whatever your financial basis or your ultimate ambition, property investment can be a lucrative sector, and whilst it is ripe with potential pitfalls, like most forms of investment, one of the most tried and tested strategies in terms of increasing the likelihood of an acceptable return from your investment, is to build a property portfolio.

A property portfolio is a collection of properties through which an investor hopes to make money. These can be any type of property, and they can all be the same type. But typically they will be a diverse range of properties in different markets.

So one property might be a student let, one might be a semi-detached property in a residential area popular with families, another might be a trendy flat in the city centre. A more experienced property investor might even have commercial rental properties in their portfolio, or a complex of residential flats or industrial units.

The make-up of a property portfolio roughly represents the level of ambition and/or risk the investor is looking to take. It is possible to have two very similar properties which provide steady income streams and which you have no immediate interest in selling, and call this a property portfolio.

Other investors prefer the relentless challenge of balancing different types of property, different locations and different tenant markets. This requires a lot more skill and knowledge, and the almost constant need to keep an eye on finances and market trends and make key decisions at the right time.

What type of investor you are and what your ambitions are, will dictate the ingredients of your property portfolio, but the underlying motivation is the same; to make decisions which will ultimately make you money. And that is what we will look at in this blog post.

For a certain type of investor, having one single property and earning rental income from it over a long term period, is perfectly acceptable, and providing you do actually make money, will realise your ambitions in terms of a wise investment.

If, however, you are looking to get into property development and become a more professional property investor, you need to be looking at building a portfolio of properties, principally because this will bring more income streams which will all be working for you simultaneously.

Of course, it is not uncommon for an investor to start with one property and to initially be happy with that. But the success of the property leads them to buy another one. This is how many portfolios develop, but it is always better to have your strategy worked out in advance and to be able to plan when you buy your next property, what property it will be and how you plan to finance it.

This is what is called having a ‘diverse’ property portfolio. We will look at this in more detail later, but effectively the main benefit of having a range of properties is that you can build a resistance to market changes and spread your risk amongst these properties.

So if one type of property is struggling to make much money, you can still rely on a different, more ‘steady’ property to bring reliable income.

Factoring this diversity into your portfolio, aligned with some patience and an ability to make good decisions based on research and good advice, means you will have a better chance of building a property investment career.

There is no sequential list of priorities in terms of what you need to look at first when attempting to build a property portfolio, not even the most obvious priority of actually buying a buy-to-let property. Because there is an awful lot to do and plan before you even get to that stage. So in no particular order, let’s look at the elements you need to consider when starting your property portfolio:

Establishing goals for your property portfolio

You need to consider what your objectives and ambitions are and set out a rough plan of how you are going to achieve them.

The goals might be for the first 12 months, then for five years, ten years and maybe even up to 40 years and your eventual retirement. There is no harm in making a roadmap for as long as you sensibly and realistically can.

Planning ahead allows you to develop strategies and put plans together for having the finance in place for each stage of your portfolio’s development. Of course, you will need to incorporate some ‘what if’ scenarios and it is perfectly okay to change your strategy and your goals as you accumulate properties.

But to start off, when you buy your first property, you need to have a plan for how this will generate enough income for you to be able to acquire a second property. And what kind of property will that be?

How will your property portfolio make money?

Traditionally there are two ways to make money from buy-to-let properties, from rental income on a month-to-month basis, and from capital growth when you eventually sell the property. Depending on the type of property and the location etc, one property might lend itself to one income stream better than another. This is fine.

You might also prefer to rely on rental income than actually selling the properties. Alternatively, you might like the idea of buying cheap properties, refurbishing them and making a profit from selling them quickly. This is known as flipping a property and is another potentially lucrative strategy.

There is nothing wrong in combining these strategies within your portfolio so that you have different income streams becoming liquid at different times. After all, any property you buy and earn rent from, you will have to eventually sell, so it makes sense to buy something with growth potential.

This kind of ‘combination’ approach can be very useful in freeing up cash exactly when you need it, but it does need very careful management and some skill in making the right decisions at the right time.

Start simple

In terms of buying a property, it is advisable to make the first part of your portfolio a fairly simple property. By this we mean that you should buy something local, in a market you know.

This will allow you to be hands-on for the time being, it will utilise your knowledge to its fullest and it will enable you to build up a contacts book of agents, contractors and professional bodies, such as legal and financial help.

These can be contacts you turn back to again and again in the future. To grow funds you need a fairly modest and dependable place to start, and tempting though it might be, you don’t want to start with a high risk investment, or one that needs significant funding, otherwise your property portfolio may never grow in number above one.

This first property will be the foundation of your business, so make it a ‘certain’ earner and a reliable investment. Ultimately, this will enable you to grow your portfolio much faster.

Financing your property portfolio

It goes without saying that you need to have your finances in place as you start your journey to building a property portfolio.

Many lenders will be able to give you a formal guarantee on what they will agree to lend you in the form of a buy-to-let mortgage, which will help in negotiations over securing that first property. But you need this in place before you start looking at properties.

You also need to undertake considerable research into other forms of finance which might help you along the way. This includes bridging finance, mezzanine finance, property crowdfunding, alternative finance and even home improvement loans and residential mortgages.

You need to keep an eye on your own home and your own personal finances, this is part of your strategy and of course needs to be prioritised as being sacred. But having finance packages in place or planned for different stages will help you on your road to growing a property portfolio.

What kind of property investor are you?

This usually boils down to whether you are a hands-on or hands-off property investor. Again, you can make this kind of decision, but shouldn’t be afraid of changing your approach.

A hands-on property investor is probably how you will start off, as you need to keep a close eye on finances, how a property develops and every decision that is made. As you build your portfolio, you might be able to loosen the reins a little, and hand over responsibilities to a property management company or a letting agent.

You might have better funding in place to allow this also. Running a buy-to-let property can be very time-consuming, even after you have refurbished the property and made it available for letting.

Maintaining the property, finding tenants and collecting rent etc all takes time, but when you are learning how to start a property portfolio, this is a necessary step on the learning curve.

Get advice

As with any financial decision of this magnitude, it is always sensible to get good professional advice. This can be financial, legal and property advice, and is not just on what you plan to do, but on what options you have and what packages and products are available.

It is sensible to build these kind of relationships from an early stage as you will rely on dependable decision-making many times along the road to building your portfolio.

Business structure

It makes absolute sense to treat this venture as a business, and manage your time and money accordingly. And as such you need to look at structure.

You can carry on as a single entrepreneur who is effectively self-employed, but there are many benefits to forming a limited company or a partnership, particularly if you have a family investor or a friend who is helping you.

From a legal and tax point of view, this could be the best way for you to proceed.

There are a number of tips and pieces of advice which you will quickly learn as you attempt to build your property portfolio.

And this section is dedicated to the learning and experience you can only gain from being in the thick of the situation.

Again, there is no priority to these factors and they all need to be considered in unison.

Don’t overstretch yourself

Inevitably it will be tempting to go for that second property and start to earn more money, but it needs to be done in a manner that you can keep under control.

You need to keep a close eye on the property market and hunt out some bargains. Overstretching yourself at this time could signal the end of your property career before it’s even off the ground.

So don’t over-commit funds, it is always better to owe less than more and use other methods to increase the value of the property.

Over-committing your finances might affect your ability to liquidise cash and/or refurbish the property to get it ready for the rental market. The second step is vital, and it has to be done right.

Specialise, diversify or both?

In terms of building your portfolio, many investors prefer to stick to one type of property, market or location and become a specialist, whilst others like to diversify more. There is no right or wrong approach, and you can have a bit of both.

Specialising means you become an expert in that type of property, can see the potential and risks quicker than others and can perhaps plan ahead with a little more clarity, whilst diversifying properties allows you to spread the risk more and develop a range of income streams, also gaining a useful knowledge of different property markets along the way.

Research your demographic

Deciding on your next move should involve in-depth research on locations, markets and tenants. You might see trends that are emerging or changing, and these might dictate what kind of decision you are making.

Student areas can be quite traditional, for example, due to their proximity to university facilities, but other areas can change and become more attractive to young professionals. Or areas of a town centre can become more trendy and fashionable.

If you can see this happening you might be able to pick up a bargain and really cash in a year or so down the line. You need to be flexible and open to change in terms of your target market, because the property market is always evolving.

Time management

This goes back to our previous point about what kind of investor you want to be. As you get more involved in properties and looking for the next opportunity, you might decide you want to take a step back from a hands-on role, or from becoming a landlord.

This is fine, and is actually good management if you find you have taken your eye off the ball in terms of finances or market opportunities, for example. There are a lot of balls to keep in the air and there is no harm in deciding to pay a third party to better look after one element of your portfolio – like refurbishment, landlord duties or finances – so that you can concentrate on your areas of expertise. Managing a multi-property portfolio is definitely a full-time job if you are taking responsibility for finances, maintenance and landlord duties for all of them, as well as keeping an eye on the bigger picture and new property opportunities opening up. Being able to act quickly is important in building your portfolio and so time management is a critical factor to get right.

Landlord responsibilities

If you have decided to be a hands-on landlord, then you need to be a good one. Your property needs to be attractive and marketable, otherwise you won’t make money and you won’t be able to grow your portfolio.

So you need to research your legal and financial obligations, such as tax, contracts, health & safety, energy performance certificates, licences etc. Learning how to be a landlord is a challenge in itself and if you make the commitment to do it this way, then it needs to be done right.

There are a number of factors that are vital to helping you grow your property portfolio in as natural a way as possible. I say natural, because you want rental income to arrive without much problem and you want the property to accumulate in value without you having to do too much. However, there are a number of interventions you will need to take at the right time to enable your circumstances to be aligned to allow your portfolio to grow.

Timing and patience

It is important you apply these characteristics and don’t make rash decisions at the wrong time. You need to research up-and-coming areas and act at the right time to buy a property you can add value to.

A suitable opportunity might take a little longer than you wanted to, to arrive, but a delay of a few months is a lot better than you overcommitting cash or picking the wrong property, which, financially, could set you back years.

At the same time, you might be tempted to take out a short term loan or other financial package to enable a property purchase to happen, and this might be inadvisable when weighing everything up.

As always, taking professional advice will help you make balanced decisions weighted with experience and knowledge.

Manage finances

Perhaps the most important factor in growing your portfolio is having the money to be able to do it. Sometimes you need to sell a property to free up the cash to purchase another one, if you can’t do this then you can consider bridging finance or other short term finance.

But you can soon get into trouble financially if things start to spiral out of control. Refurbishment delays or a protracted sale, or buyers backing out, can all do this and are all quite common. Ultimately, if your financial commitments are well-managed and you have funds available, that gives you more freedom to make these kinds of decisions.

Diversification

This is a word used a lot in terms of growing a property portfolio, because it can simultaneously manage a number of factors. We talked earlier about having a steady property that brings in dependable income, and how this will benefit you if another property is struggling to bring in income.

An alternative scenario to this is how a reliable property can provide the basis for you to apply a little more risk to your portfolio.

If you know you have regular income coming in from a rental property – maybe a student property where there is a long-established market of tenants, or a settled family on a long-term contract – then this allows you to be a little more risky with another property.

So you could perhaps afford to pay a little bit more for a property, knowing you have funds to fall back on? Or you could buy a cheaper property knowing that it might take a year to get it refurbished and ready to put on the market?

Ultimately, you want all your properties to bring money in, but diversity is accepting that if they do so at differing rates or at differing times, that is okay as it keeps cash available and flowing through your business. The only problem is if you cannot sell or rent a property at all. Then it is dead money.

Finding the right property

We have spoken before about having a strategy for your properties, but this has to be flexible for a given time and situation.

A new property for growing your portfolio has to be right in terms of not stretching your finances, not committing too much of your time and giving a good balance to your portfolio in terms of risk, income and capital growth potential.

But each of these factors can change every few months, and therefore a property that wasn’t right and didn’t make sense 12 months ago, might suit you perfectly now.

Exit strategy

For every property you purchase you need a plan for how you intend to relinquish ownership of it. This might differ from one property to the next.

You might find that the first property you bought becomes such a reliable income stream that you keep it for 20 years or more, and if you only break even on its capital growth, then it doesn’t really matter, because you have earned considerable rental income from it over many years, and this has enabled you to make more money from other properties.

Another form of exit strategy is to flip a property for a quick profit, whilst another is to make money five years down the line by selling a property for a decent profit that you rent out in the meantime, because you know the location and market is becoming more desirable.

An exit strategy doesn’t always have to be a hugely profitable one, as long as you have a goal for each property and a pathway to achieving it, and that this goal contributes to the overall profitability of your portfolio of properties.

Building a successful property portfolio

There is no one secret to how to grow a successful property portfolio as there are so many contributing factors; i.e. your finances, the types of properties you buy, your ambitions, the economy, the property market and your decision-making abilities. All of these factors managed well in tandem, can certainly help you become a successful property investor with a good range of diverse properties.

Making good decisions is arguably the most important factor. The other variables such as property value, property potential, refurbishment costs and the market conditions, can only really be addressed in association with each specific property and situation.

Ultimately you want each property to give you a good return on investment, and even if these are modest in terms of percentage at say 10%, this 10% return on investment grows to be exponentially more profitable each time.

The key to making good decisions is basing them on a plan and on experience, being patient and taking good advice. So it is true that the more experienced you are, the better you will become in expanding your property portfolio.

And this is where you will be able to rely on your instincts a little bit more, because you will be able to see an opportunity and know it is worth taking, because you have the experience. Otherwise it is a risk. Building a property portfolio does involve an element of risk, but if this is based on calculated and considered decisions, then the risk is considerably reduced.