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Residential Property Investment - Building Your Portfolio

Perhaps you already own one investment property and are now thinking about acquiring another. What should you be thinking about before you take the plunge?

1. Know your goals

The reason why you acquired your first investment property may or may not have anything to do with the reasons prompting you to consider acquiring another one. And while there's no reason why they should, it's essential that you know what you want to get out of enlarging your portfolio. After all, while owning more investment properties hopefully means - at least ultimately - more money, it also necessitates a further outlay in terms of both money and time.

The two key reasons why people choose to invest in property don't change much. Sometimes it's either because they want to increase their own income courtesy of the rent received or because they are looking to make long-term capital gains. Frequently, however, an investor's motives are less clear-cut and they have a mixture of the two goals.

Identifying what motivates you is essential in helping you identify the right property to buy and the right tenants to let it to. For instance, if you are focussed on maximising income, you may be more interested in purchasing a property suitable as a house share, perhaps even a House of Multiple Occupation. However, of course, you'll need to be aware that the flip side of such a decision might be that managing that sort of property is more time-consuming (potentially a high turnover of tenants and a higher than average number of ongoing maintenance jobs).

2. Think back to your first property

Before becoming an investor with more than one buy-to-let property, think about the decisions you made when you bought it. For instance, did you choose somewhere close to where you currently live in order to make management and maintenance easier? Or were you happy to outsource that side of affairs to a letting agent? If so, how has paying the letting agent's fees affected your income from the property? Finally, are you happy to continue the same strategy with your next property acquisition?

3. Decide what to buy and where

While this step doesn't mean identifying a specific property, it does mean zeroing in on a particular type. For example, perhaps you are looking for a large terraced home suitable for letting to a group of students. If that's the case, you'll want to restrict your property search area to neighbourhoods currently popular with students. Equally, if you have decided to rent to the young professional market, you'll probably want to focus more closely on one- or two-bedroom properties located in a city centre or within easy commute of one. And if you're not wedded to a specific area, you might want to investigate which areas of the UK could give you the best returns on your investment.

4. Due diligence

It might be a business term, but if you're planning a property portfolio, you need to think in business terms - and due diligence is an essential component. This means:

- Investigating current market trends. Knowing what is currently doing well - i.e. letting out for a good price - is essential. As well as speaking to local lettings agents to get their viewpoint, talk to other investors and landlords in the area (if you know any) and look through current rental listings. What features do they offer? For example, do they have parking, a concierge, an on-site gym? Are they fully furnished, part-furnished or unfurnished, or does the tenant have the option to pick the arrangement that best suits their needs?

- Looking at asking and sold property prices and working out how these might affect your eventual annual return. In order to do this effectively, you'll also need to look at average rents for properties similar to the type you hope to buy. If you can, find out how much of a discount (if any) landlords or letting agents are accepting on advertised rents. If this information is tricky to come by, you may be able to gauge the situation by investigating how long particular properties are advertised for rent. Obviously, somewhere that is snapped up within days or even hours of first advertisement is far more likely to have let for the advertised price than something that languishes for weeks or more. Online property portals are an excellent, and anonymous, way of conducting this sort of research.

- Consider joining one of the many online property investment/landlord groups. Facebook is a good place to start, but there are also others. Most are private closed groups, which means you'll need to join before asking questions or browsing already available information.

5. Plan your finances

Before you offer on a new property, you'll need to have a very clear idea of how much you can afford to spend on the purchase, including any necessary refurbishment or redecoration. To get to this figure, you'll need to know what level of rent you'll need to charge (and, of course, be reasonably confident of achieving it) - because it's your rent that will cover any mortgage payment plus other necessary outgoings, like insurance and maintenance. Once you have these estimated figures in a spreadsheet, you can ask yourself whether they represent an acceptable return on your investment and whether you could cope financially in the short to medium term if you lost your tenant for whatever reason.

6. Plan your offer strategy

You may be looking to pick up a bargain and, in some markets, this may be possible. In others, where buyers outnumber sellers, you could be less lucky. Of course, there are ways of trying to improve your lot. For instance, many investors like buying at auction. Sold property prices of auction homes are often lower than those on the open market, although this can be for good reason - for example, a property that's currently unmortgagable or in need of signification renovation. What's more, you may also find yourself in direct competition with other investors, some of whom could have deeper pockets and more experience. Ultimately, whatever purchase strategy you decide on, you'll need to set a maximum budget and not be tempted to go above it. Investment property purchases are definitely not a time for heart over head offers.

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Source: 25.01.22

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