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Home > News > How to Start a Property Portfolio in the UK | Plaza Estates London

How to Start a Property Portfolio in the UK

By Anthony Irving  //  Fri 1st April 2022
The private rental sector is growing rapidly, with at least one third of Londoners now renting out their home. 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.
How to Start a Property Portfolio

While the buy-to-let landscape has changed a lot over the past decade, interest rates are still low, landlord residential mortgages are more affordable, and property investing can still reap good financial rewards.

Building a property portfolio can be daunting, but it needn’t be too difficult, especially if you take heed of the following 11 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 make a 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 very long time anyhow in order 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 – 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. This will allow you to continue concentrating on your current profession, business or even retirement.

2. Do your research

Like any investment, it is important that you do your research before dipping your toe in. Spend some 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 definitely be considering aspects of the business, 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 has experienced huge growth over the past couple of years, thanks to Rishi Sunak’s stamp duty holiday and the general ‘race for space’ brought about by the pandemic. However, there are areas that even before Covid struck, which were experiencing steady growth in house prices. Once the market settles towards the end of this year, thanks to huge increases in the cost of living, these will be the areas to once again focus on.

Demand - Central London will always be able to attract tenants, thanks to its vibrancy and employment opportunities. Consider the type of tenant you are hoping to attract and what will appeal to them. Families will always want an area with a good school and parks nearby, for instance, while students will certainly want to be within walking distance of their university or college – or at least be just one bus ride away.

3. 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 in general. 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, so too have checks around utilities. Tenants also need to be shown an Energy Performance Certificate and be told where their deposit has been secured.

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".

4. 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, reduced the rates payable, but this ended in June 2021.

Other costs you need to think about when planning the financial side are solicitor and/or conveyancer 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.

5. 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. If you were unable to make the repayments on one of your buy to let properties, you may be forced to sell several properties to get on top of your finances again.

6. Always be vigilant of your cash flow situation

You should treat your property investment career as a regular 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.

7. Landlord tax

As a landlord you will have to 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 will still have to 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 for, go to the government website and look under self-assessment for landlords.

8. Would company status suit you better?

If you have several properties – and certainly at least a handful – then it may be more profitable for you in terms of tax payments, to register as a limited company. That’s because corporation tax for higher rate tax payers is lower than income tax.

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 certainly 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 having to pay capital gains tax on your properties when you ‘sell’ them to your company.

9. 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.

10. Diversify

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.

11. 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

Is company status better for you as a landlord? It’s not always easy to tell when you are first starting out on the property market. If you are considering central London as a location for your first rental property then do get in touch with the team here at Plaza Estates. We are happy to provide no-obligation advice on how to build a property portfolio. We can also show you some of the properties we have available and which may suit your budget and intentions.    

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