The private rental sector is growing rapidly, with 30% of Londoners renting their home. As London's growth in property prices continues to outstrip wage growth, the number of renters is expected to increase significantly.
While the buy-to-let landscape for landlords has changed a lot over the past decade, interest rates are still low, buy-to-let mortgages are more affordable, and the property business is still a reliable source of income.
Building a property portfolio can be daunting, to help we have complied 10 steps you can take to start a property portfolio from nothing:
1. Identify your long term goals
Before you buy your first buy-to-let property, think about your long term goals.
Do you want to make returns regularly through rental income or make a profit from the capital growth when you sell 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 truly 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. The alternative is to hire a lettings and management agent to do the job for you.
2. Do your research
Like any investment, it is important you do your research. Spend some time researching the buy-to-let property market to discover the best location and target market for your property investment business. Here are some of the things you should think about:
- 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 – Look for areas that have seen a steady growth in house prices and where the growth is expected to continue.
- Demand – Central London will always attract tenants. Think carefully about the type of tenant you are hoping to attract and then look for something that will appeal to them. If, for example, you're looking at young professionals, you'll probably want a lively area with good transport links and plenty of amenities. Having a good idea of your target market will help you to style and market the property to their tastes and needs.
- 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 and energy efficiency. You 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. Read more about your responsibilities on the gov.uk website.
If you are considering building a property portfolio in central London, you might want to read our article "The Best Buy-To-Let Property Investment Areas in London
3. Make sure you are financially ready?
Before you decide to 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 it is possible to buy your first investment property with a smaller budget. 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 tax 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. The stamp duty holiday, introduced in July 2020, reduces the rates payable, but this comes to an end in June 2021. Between June 2021 and September 2021, the rates will be tapered. Click here
to read more about Stamp Duty Land Tax.
Other costs you need to think about when planning the financial side are solicitors fees and any costs you will incur getting the property ready to rent.
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.
If you want to grow an extensive property portfolio in the long term, you need to start cautiously. Be careful of exposing yourself to too much debt so that if you were unable to make the repayments, you wouldn't be forced to sell several properties.
5. Keep on top of your finances and cashflow (treat it like a business)
A property portfolio is a business, so don't forget to treat it as such. Make sure you keep on top of your finances, especially your cash flow situation. Set up clear systems for recording incomings and outgoings, factor in costs for repairs and maintenance and make sure 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 will need to create a system to keep a record of all documents related to your tenants and the property itself.
6. Get your tax right
HMRC classes all the rent landlords receive as income, which means it must be declared on your end-of-year tax return. If you are currently in employment and are taxed by PAYE, you will need to register for self-assessment when you start a property portfolio.
As a landlord, you will pay tax on the profit you make after allowable expenses have been deducted. Read more about tax, self-assessment and allowances for landlords on the gov.uk
7. Consider setting up a limited company
Recent taxation changes meant that setting up a limited company could be a more efficient way of managing your property investment, especially if you're looking to build your property portfolio.
If you're a higher rate taxpayer, who owns rental property through a limited company, you'll pay corporation tax on profits at a lower rate than income tax.
Whether this is more tax-efficient will depend on your personal circumstances and portfolio, so get advice from an accountant. If you plan to have just one or two properties yielding a modest income, limited company ownership may not be for you. However, if you envisage have several properties in your portfolio, it may be worth considering.
8. Treat your tenants as customers
To build a successful property investment portfolio you’ll need to be friendly and approachable with your tenants while remembering it's a professional relationship. 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.
As you grow your buy-to-let portfolio, remember to diversify your investments. By investing in just one area or type of property, you limit your potential and make yourself susceptible to failure if the market slows in your particular niche.
When it is time to add additional properties to your portfolio, consider investing in a different property type or a different area.
10. Have an exit strategy
Consider what to do when it comes to selling your property. The goals you identified at the beginning 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 you can before selling at the optimum time. Keeping your exit strategy in mind can help you make sensible decisions throughout your investment.
We can help
Letting a property as a business can make the difference between a profitable investment and one that flounders. If you are thinking of investing for the first time, and have central London in mind, contact Plaza Estates for advice on how to build a property portfolio and to find out more about the properties we have available.