With average values rising by 1.1% in this year’s first three months, the UK property market has performed better than many anticipated.
However, property investment has its specific challenges, from the ever-changing landscape of tax structures to the complexities of loan agreement factors. Despite the uncertainties, building a property portfolio remains a lucrative strategy.
While a sizable portfolio offers substantial rewards, the process demands considerable effort and planning. Property investment involves more risks and variables than other investment strategies, and you must consider them before committing.
Don’t worry. This comprehensive guide will help in building a property portfolio that appreciates over time.
Benefits of building a property portfolio
Focusing on property portfolio investments invariably benefits investors rather than investing in a single property type.
The property market can experience economic downturns, leading to stagnant property prices. Investing in multiple properties in different locations maximises your returns and protects your investment.
It will help you spread the risk during these uncertainties and, in turn, assist you with a more stable cash flow.
Properties tend to act as a hedge against inflation. With the increase in urbanisation, property prices and rental income often rise. Proper portfolio planning can lead to equity building that can be leveraged to finance the new properties in your portfolio.
How to get started with building a property portfolio
1. Set your targets
Before investing in any property, it is essential to consider your investment goals. Think about the investment returns you want to achieve from your property portfolio.
Will you enhance your earnings through rental income, or do you want to maximise investment returns by selling your property when its price increases?
You could also reap the benefits of these two strategies by waiting to sell your property until its value rises and renting it out during that tenure. This will help you maximise the success rates of short-term and long-term investment plans.
2. Conduct market research
The next step for building a property portfolio is to perform thorough research, which will help you find the right property type and best areas for investment. Below are a few aspects you should consider when planning your property portfolio.
- Check the current property trends and demands
- Get an idea of the profits from the likely rental returns
- Find the amenities and transport facilities near the property
- Calculate the pattern of average rental yield for the chosen area
- Identify areas where property values are looking likely to increase as opposed to buying at top rates
- Have a clear idea about the additional costs you will incur, such as taxes, insurance, maintenance, and stamp duty
3. Understand the risks involved
Before buying a property, you should consider the risks associated with it. These include market, liquidity, property portfolio management issues, and legal and maintenance risks. As a property owner, you must calculate your risk tolerance level. Understanding these risk factors will help to inform your property investment decisions.
4. Choose the property types for your portfolio
The best way to build a property portfolio is to choose variations in property types. Below are some of the popular property types you can hold as a part of your portfolio, and each has pros and cons and different costs associated with it:
- Residential buy-to-let properties are residential properties that you can rent out to tenants for a more extended time.
- Student accommodations are properties of different types. You can purchase a residential property and alter it to student accommodation (remember to register it as an HMO if there are more than three tenants) or invest in a hall of residence under purpose-built student accommodation (PBSA).
- Holiday lets involve buying a property and renting it out to visitors for short-term stays.
Property development, also known as ‘flipping houses,’ is cheaper because it requires substantial renovation and maintenance work. After completing the work necessary, you can sell it at a higher price. - Buy-to-sell properties are bought at a lower price and sold at a higher price. Not all investors are interested in generating profits from rental income, so this can be a good option.
- Commercial properties are rented to business owners. Examples include retail space, office spaces, and warehouses.
5. Plan a purchase strategy
When you decide to buy a property, it is better to have a purchasing strategy to maximise your investment return. If you have cash, you can purchase the property outright and gain ownership.
However, other options exist, such as opting for properties sold in auctions. Here, you can obtain properties at a lower price, although there may be slightly more risk.
Another option is investing in Below-Market-Value Properties (BMV), where you will find properties that still need to be completed. You must complete the repair work according to your needs, and that cost should be factored in.
6. Manage your finances
Organising your finances is a crucial step in optimising your property portfolio. You must consider your budget and the means of financing your property portfolio, whether you plan to pay cash or opt for a mortgage or other loan options.
You will need a different amount of capital based on the type of property you plan to buy and how you intend to finance it. For instance, you will have a substantially lower entry cost if you plan to buy a home using a mortgage rather than paying cash.
As a property investor, you must maintain an emergency fund for void periods, property maintenance expenses, and unforeseen circumstances.
Below are the four main financing options, each with unique advantages and considerations.
- Cash: Using your money is one of the simplest ways of financing properties as it will not have any lending terms and interest rates to pay.
- Mortgages: These are the most common financing options property owners choose for investing in their portfolio. A mortgage lets you borrow a large amount of capital (almost 80% of the property price) instead of controlling your assets. You need to find mortgages with flexible repayment options and competitive interest rates.
- Private lending: Borrowing money from an individual, such as friends, family, etc., is considered private lending. The loan terms and interest rates may vary depending on your relationship with your lender.
- Hard money lending: You can only borrow money from hard money lenders when conventional mortgages are not feasible. It is a short-term bridging financing option that can be opted in case of a time-sensitive deal. This option will be helpful when you want to invest in a property, but your money is tied up in other portfolios.
7. Focus on the tax considerations
Emphasising tax planning while managing a property portfolio will yield maximised returns. The amount of tax varies due to certain factors like:
- If the owner has only one property or more
- Location of the property
- Owner of the property
- Value of the property
The following are the different types of taxes that must be considered when structuring your portfolio:
- Stamp Duty Land Tax (SDLT) is a one-time tax the buyer must pay upon purchasing the property.
- Capital Gains Tax (CGT) is a one-time tax calculated based on your profit after selling your property.
- Rental income tax refers to the tax that property owners must pay on the income they earn from renting out their properties.
- Inheritance tax is a tax you are entitled to pay as a property owner if you inherit a whole or part of someone’s property.
- Council tax is an annual property tax collected by local authorities to fund various local services, such as libraries and park maintenance.
8. Build a diversified portfolio
Even though properties are considered one of the most reliable investment categories, it is still advisable to diversify your portfolio to protect from market fluctuations and to avoid financial losses.
This does not mean adhering to one type of property investment but merely investing in different properties in different geographical locations at various prices.
For instance, you might own a residential property and a commercial office space, limiting your risks and maximising your returns by targeting different types of tenants.
Having multiple income sources will help you spread the risk. For example, if one property decreases its value, you will still have other sources of income from other properties.
3E’S Accountants:
Your partner in building a property portfolio
Building a property portfolio might sound daunting, but it will yield handsome rewards if done correctly. If not researched carefully, you may lose money, and it is better to seek guidance from an experienced property investment advisor who will help you make informed decisions about creating a property investment strategy.
While building a property portfolio has risks, partnering with us will help you meet your financial goals.
Start small, diversify your investment, learn from your mistakes, build momentum, and increase as opportunities come. At 3E’S, our advisor will help you optimise your property portfolio according to your long-term financial plan.
Book a free consultation with us to get started.
