As the capital's growth in property prices continues to outstrip wage rises, the number of people renting their home is expected to increase significantly over the next few years and beyond.
While the buy-to-let landscape has changed significantly over the past decade, property investing can still reap good financial rewards for landlords.
Building a property portfolio can be daunting, but it needn't be too tricky, especially if you take heed of the following steps to starting a property portfolio that the team here at Plaza Estates has put together:
1. Identify your long-term goals
Before you buy your first landlord property, think about your long-term goals.
Do you want to make returns regularly through rental income, or would you prefer to profit from the capital growth you acquire on selling the property? We recommend that you focus on your investment as a source of rental income - not capital growth through a house price gain. You may need to hold onto the property for a long time to see it increase in value.
Think about how much time you have to devote to your property business. Consider whether you want to be a hands-on landlord responsible for finding tenants, collecting rent payments and managing maintenance issues – not to mention marketing for new tenants when potential void periods arise. The alternative is to hire a lettings and management agent to do the job for you. Hiring a letting agent will allow you to concentrate on your profession or business or enjoy retirement.
2. Do your research
Like any investment, doing your research before dipping your toe in is essential. Spend time researching the buy-to-let property market to discover the best location and target market for your property investment business. For instance, you should consider aspects such as:
Rental yields - Rental yield describes your annual rental income as a percentage of the property's total value. Buy-to-let investors use it to determine whether or not a property will be a good investment. Look for areas and postcodes with the best rates of return. For more information, read our article on how to work out and calculate rental yield.
House price growth - Property in most parts of the UK experienced huge growth in the past few years. In recent months the market has been settling, with the rising cost of living and changes in mortgage rates influencing buyers.
Demand - Central London will always be able to attract tenants, thanks to its vibrancy and employment opportunities. Consider the type of tenant you hope to attract, and what will appeal to them when investing in property. Families will always want an area with a good school and parks nearby. Students will undoubtedly want to be within walking distance of their university or college – or be just one bus ride away.
3. Make sure you are financially ready
Before you build a property portfolio, you should also consider whether you have the cash available to buy a rental property. With the help of buy-to-let mortgages, buying your first investment property with a smaller budget is possible. However, you will need some cash for a deposit, most lenders will look for a deposit of 25% before they grant you a buy-to-let mortgage, but a deposit of 40% or more will get you the best deals.
You will also need to factor in stamp duty costs. Stamp duty tax is a one-off tax paid when you buy a property in England and Northern Ireland. Stamp duty rates vary depending on the purchase price of the property. The amount you pay is calculated on the part of the property purchase price falling within each band. Buy-to-let investors must pay a 3% surcharge on each band.
Other costs you need to consider are conveyancing fees and any costs you will incur getting the property ready to rent, such as buying furniture, getting gas checks, organising an EPC and marketing etc.
4. Start small and grow cautiously
Choose your first investment wisely and opt for a low-risk option. You might want to choose a property close to where you live as you will know the area better, and keeping on top of maintenance will be easier since you won't have to travel far. You can also easily keep an eye on your investment, as you are likely to be over-cautious as a first-time landlord.
If you want to grow an extensive property portfolio in the long term, you need to start slowly and will plenty of thought. Be careful of exposing yourself to too much debt, for instance. You may be forced to sell several properties if you cannot repay the mortgage for one of your buy-to-let properties.
5. Have an offer strategy
How do you start building a portfolio without spending over the odds? Refine your property strategy and think long-term. Follow wider property market trends and monitor upcoming local developments to get the timing right.
If you overspend on a buy-to-let property, it's harder to make a good return on your investment. This tip doesn't just apply if you're working out how to start a property portfolio with no money to spare. Many property investors offer low to keep tight reins on their budget.
6. Understand the rules and regulations
Get to know the lettings industry inside out - and the relevant legislation and regulations. The buy-to-let sector has been subject to multiple changes in recent years, with stamp duty increases and changes to mortgage tax relief, as well as stricter rules around gas safety checks and energy efficiency. You also need to know about the checks that must be completed before your tenancy agreement is signed and your legal obligations to protect your tenants' deposits in a government-backed scheme. All of this information, and more, can be found on the government's website under 'landlord responsibilities'.
It's a good idea to familiarise yourself with all the dictates and rules when it comes to being a landlord and letting out property. Fire safety regulation for rented property has been tightened, and so too have checks around utilities. Tenants must also be shown an Energy Performance Certificate and told where their deposit is secured. You can find more information on landlord safety checks here in our article.
7. Choose good tenants and look after them
To build a successful property investment portfolio, choose good tenants and treat them well. Screen tenants with credit checks and references to ensure they will pay promptly and look after your property.
Be friendly and approachable – but keep things professional. By being helpful, easy to contact and on top of repairs, you'll encourage your good tenants to stay in the property, eliminating the dreaded void periods.
8. Consider hiring a letting agent
Are you wondering how to start building a property portfolio while you work another day job? Property management services can give you the capacity to grow your portfolio of investment properties.
A good letting agent can vet tenants, check they have the right to rent in the UK and collect payments, field maintenance requests and more.
9. Always be vigilant of your cash flow situation
A property portfolio is a business, so don't forget to treat it as such. Ensure you keep up with your finances, especially your cash flow situation. Set up clear systems for recording incomings and outgoings, factor in repairs and maintenance costs, and ensure you will always have enough money to cover the mortgage payments. Stress-test your calculations to ensure that you can financially cover inevitable void periods.
As well as your finances, you must create a system to record all documents related to your tenants and the property itself.
10. Landlord tax
As a landlord, you must record rental income on your self-assessment form at the end of the tax year. Even if you presently pay tax as an employee, you must declare rental income separately when you start a property portfolio.
Tax is due on profitable income after you have deducted allowable outgoings. To find out what you can claim, go to the government website and look under self-assessment for landlords.
11. Would company status suit you better?
If you have several properties – and certainly at least a handful – then registering as a limited company may be more profitable for you in terms of tax payments. That's because corporation tax is lower than income tax for higher-rate taxpayers.
Whether this is more tax-efficient will depend on your personal circumstances and portfolio, so it's best to get advice from an accountant familiar with property matters. If you plan to have just one or two properties yielding a modest income, limited company ownership may not be for you; it may be best to stick to paying income tax. However, if you envisage you may, over time, have several properties and more in your portfolio, it may be worth considering at the outset before you start branching out and buying more properties. That's because switching from self-assessment to company status will mean paying capital gains tax on your properties when you 'sell' them to your company.
As you grow your buy-to-let portfolio, remember to diversify your investments. Investing in just one area or type of property limits your potential and makes you susceptible to failure if the market slows in your particular niche.
When adding additional properties to your portfolio, consider investing in a different property type or area.
13. Have an exit strategy
Consider what to do when it comes to selling your property. The goals you identified when you initially decided how to start a property portfolio will tie into this. For instance, if you are investing to build a retirement fund, you will want to generate as much rental income as possible before selling at the optimum time. Keeping your exit strategy in mind can help you make sensible decisions throughout your investment.
14. We can help
Approach your local estate agents and make the most of their first-hand knowledge of the area's property market.
If you are considering central London as a location for your first rental property, get in touch with the team here at Plaza Estates. We are happy to provide no-obligation advice on how to build a portfolio. We can also show you some of the available properties that may suit your budget and intentions.