The difference between having a single Buy-to-Let property and a whole portfolio can seem like a big shift for investors, with each property contributing to potentially much higher gains but also more responsibility and risk. Nonetheless, establishing and building a portfolio can be a rewarding process, bringing with it a generally consistent passive income and the opportunity for financial freedom.
With the demand for rental property climbing, more people are now turning to the Buy-to-Let market while current investors are expanding their empires. But how should you build your portfolio?
SevenCapital, a leading UK property developer, discusses how investors can build their property portfolios and what to consider at every stage:
Establish a Clear Plan & Goals
Like with any investment, having a clear plan with specific goals to work towards can be crucial to your portfolio. When scaling your empire, you should consider what you’re working towards at every step – whether that’s early retirement, financial security or a goal more personal to you.
Whatever your motive, Buy-to-Let property can often help you get there. However, your investment route, and your portfolio, will look different depending on this consideration. Determining your holding period will typically form part of your plan, with this being the time dedicated to growing your portfolio.
It could be five, ten or twenty years, but this holding period will largely depend on your goals and whether they’re centred on short or long-term returns. Whilst we all know that Buy-to-Let property is typically more lucrative on a long-term basis, consistent growth in the market can also make for competitive short-term investment.
Finance options will inevitably be a big part of building your property portfolio, with this decision also influencing your rates of return. From cash investments to interest only and repayment mortgages, there is a lot to consider.
While cash investments are much less common, this avenue means that all rental income you make is yours to spend. Mortgages make buying property more accessible but will obviously require a monthly payment, whether you’re paying off the loan and interest or just the interest. Depending on the amount of your monthly repayments, you’ll want to consider which properties will provide the best rental yields to cover these outgoings, as this is a common way of scaling investments and should be a crucial part of your portfolio plan.
Diversify your Portfolio
Building your property portfolio is one thing, but doing it well is another. The key to any successful investment portfolio is diversity. Having a variety of properties is paramount for mitigating risk and can help fight against void periods.
For those with monthly mortgages and bills to consider, void periods across an entire portfolio can have a devastating impact, potentially resulting in you making repayments out of your own pocket.
But how exactly can you diversify your property empire? There are multiple avenues that investors can choose when building a portfolio, from different property types, to investing at various price points and in several locations, all of which work to reduce the risk of your empire.
Arguably the most common method of diversifying is by purchasing properties in multiple locations – allowing you to tap into the potential of multiple markets. This is when it’s vital to perform your due diligence and examine the different rental yields across various regions – especially between individual cities and hotspots within those cities.
With this in mind, those who have invested wisely and built a portfolio across numerous locations can feel less threatened by any changes in tenant demand and the subsequent fluctuations in average rents because they’re not reliant on the performance of one market.
Similarly, investing in different property types can help build the resilience of a property empire and help you reach different objectives faster. For example, while a HMO investment will deliver exceptional rental returns, it may not benefit from the capital growth you’d see in an apartment.
From houses to studio apartments, investing in different properties can reduce the impact of evolving tenant demands and any void periods. By investing in a 2-bed house, a 1-bed apartment and a studio, for example, your Buy-to-Let properties will appeal to a variety of tenants, from families to young professionals. Having targeted various demographics with different property types, not only will your portfolio become more resilient, but changes in both demand and rental yields will likely have less impact on your overall passive income.
Maintain your Assets
The first two steps of building a property portfolio will likely demand the most research, but for a lot of investors, the work doesn’t stop here. At this point, you’ll need to decide whether you’re a hands-on or a hands-off landlord, which in turn will be decided by how much time you have to devote to maintaining your property portfolio.
More often than not, letting agencies will offer a full management service, which is a popular choice amongst landlords, especially overseas investors. From sourcing tenants to handling day-to-day inquiries and issues, opting for a full management service is one for the hands-off landlords. But with this additional cost inevitably reducing your returns, it’s understandable that being a hands-on landlord is also an increasingly common option.
With a list of responsibilities that will include you maintaining the property, liaising with tenants and seeing to any emergencies, being a hands-on landlord comes with its own source of challenges. While this decision may change as you add more properties to your portfolio and the number of responsibilities grows, there is now more support than ever for both hands-on and hands-off landlords.
From establishing your financial plan and investment goals to diversifying your portfolio and maintaining your assets, building a property empire comes with many considerations. However, the reaction of the property market to external factors that we have seen over the past 12 months has only highlighted its resilience, and with increasing support for all kinds of landlords, it’s likely that more investors will continue building their property portfolios.
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