Building a property portfolio can be daunting – but with the private rented sector growing at record rates, it can be a highly valuable financial decision.
Are you looking to start a property portfolio? Making your first investment, and then moving from one property to several, is a big and long-term project. We’ve compiled seven steps to help you build your property portfolio in a sustainable way.
How to start a property portfolio
1. Identify your goals
The first step with any property investment is to think about your financial aims. Are you primarily interested in capital appreciation? Or do you want to invest in property that will provide a sustainable rental income? Or, perhaps most likely, are you looking for a combination of the two?
Your answer to these questions will help to determine your first property purchase, and the way in which you build your portfolio. In order to start on the right foot, you need to have your goals and priorities in place from the very beginning.
2. Start small
It’s not generally recommended that new investors build a property portfolio with multiple properties from the off. Instead, you should think about starting small and building sustainably.
Choose your first investment wisely. Would you prefer a property close to where you live, in order to be able to keep on top of maintenance? Or are you happy to try further afield and entrust management tasks to a third party? For help choosing, try our guide to the best buy-to-let areas in the UK.
3. Offer low
It’s currently a buyer’s market for property, and many analysts predict that prices will fall further. Gone, at least for now, are the days of lengthy bidding wars.
Don’t be scared to offer below the asking price – the worst that can happen is that you’re turned down. Increasingly, property is being driven down due to a lack of demand, although bear in mind that the picture for pricing is not even across the UK.
4. Keep an eye on cashflow
As you start your property portfolio, make sure that you keep an eye on your key metrics – what businesses would call their KPIs. Does your rental income cover your mortgage payments and other outgoings, while still providing a reasonable return? Are you managing void periods sensibly?
Identify the most important numbers that you need to track, and make sure that you keep a constant eye on them. You need data to back up your investments as you grow your portfolio – again, treat this part of the exercise just as you would if you were running a business.
5. Don’t forget tenants
All too often, it can be tempting for landlords starting and building a portfolio to forget about the most important other party – the tenant. You need to work hard to ensure that your tenants are satisfied, both in order to maximise tenancy lengths and to minimise void periods.
However, you also need to keep on top of the business side of the relationship, and that begins with choosing the right tenant. If you’re doing this yourself, rather than through a letting agent, you might find our tips for choosing the right tenant helpful.
6. Grow cautiously
Don’t run before you can walk. If you want to build a long-term property portfolio, you need to be cautious. There is a range of indicators suggesting medium-term volatility in both the property market and the economy more generally, and you need to keep abreast of these.
But you should also pay attention to your debt position. As you grow into multiple properties, try to avoid cross-collateralisation – that is, borrowing against the value of multiple properties at once. If the worst happens and you can’t service a debt, cross-collateralisation can mean that you’re forced to sell multiple properties in order to pay off just one loan.
7. Remember your exit strategy
Finally, make sure you understand your ultimate goal.
What’s the ideal end result for your property portfolio strategy? Are you looking for a sustainable retirement income? Or do you intend to liquidise your investments at some point in the future? By keeping your exit strategy in mind at every step, you can help to ensure that you make sensible investment decisions throughout.