A property portfolio is a collection of investment properties owned by a person, a group of people or a company. It might include HMOs (Houses of Multiple Occupancy), family homes, student lets and holiday properties.
Landlords make money from property investments through monthly rent and capital growth when they sell. With returns on savings at a historic low, more people are turning to property for better financial returns.
By purchasing different types of properties, perhaps in different locations, landlords spread the risk that comes with investing in just one property. Here we talk about what you need to know if you are planning to start a property portfolio or expand an existing portfolio in 2021.
Do I need to secure a buy-to-let mortgage?
A buy-to-let mortgage is an ordinary mortgage with differences. Interest rates and mortgage fees are higher, but it is illegal to rent out a property without a buy-to-let mortgage unless you own the property outright. To find the best mortgage rates it is advisable to speak to a mortgage broker.
Most buy-to-let mortgages are interest only which means you only pay interest on the money you have borrowed every month. The original loan is paid in full at the end of the mortgage term.
How much can I borrow?
The amount you can borrow depends upon your financial circumstances and the amount of rental income you are likely to receive from your investment. Generally, mortgage lenders look for a rental income that is at least 25% higher than the mortgage payment.
How much deposit will I need to save?
You normally need a deposit of between 20% and 40% of a property’s value. You can re-mortgage another property you own and use the equity as a deposit. It is important to talk to a specialist financial advisor to ensure you understand the financial risks involved.
How much stamp duty will I pay when I purchase a buy-to-let?
The government’s stamp duty holiday, which expires in June 2021, means landlords can currently make significant savings.
At the moment landlords only pay 3% stamp duty on properties up to a value of £500,000. In normal times landlords pay 5% for properties between £125,000 and £250,000 and 8% between £250,000 and £925,000.
What percentage rental yield do I need to achieve?
Rental yield is the return you receive on your investment through rent, taking into account the purchase price of the property and the cost of any refurbishments.
It is advisable to look for properties with a rental yield of at least 8% to meet mortgage repayments, repairs, insurance, times the property may be vacant and any unforeseen costs.
How do I calculate capital growth?
Capital growth is the increase of the value of a property over time. Before you buy a property, you will need to predict capital growth by considering what it is likely to be worth in five years’ time.
An experienced estate agent or letting agent who understands the local area will be able to help you. Savills predict the biggest rises in house prices are likely to be in the North West with a 24.1% increase by 2025.
You can also carry out your own research into whether a location is likely to be sought-after in future by looking at employment opportunities, regeneration projects, new developments, transport improvements and so on.
Talking to people in the community such as librarians may also give you further insight into local plans. You could also talk to experienced local landlords via online forums.
How do I choose the best location?
The best location depends upon your business goals. Are you looking for property that will provide you with a generous monthly income or are you more interested in investing in property for a retirement fund? In other words, is rental yield or capital growth more important to you? Perhaps your property portfolio will include a mixture of both types of property?
To find places with active rental markets you can use property websites like Rightmove and Zoopla. These websites will give you a rough idea of the rental yield you might expect to achieve in a certain area.
Estate agents and letting agents will also be able to give you information about tenant demand for certain properties in their local area. Manchester currently has the largest rental market in the country with 31% of the population renting privately. In certain parts of Manchester and Liverpool rental yields are as high as 10%.
Another consideration is whether you are going to manage the day-to-day maintenance of properties yourself or use the services of a letting agency. If you are going to do it yourself then properties will need to be local to you.
What type of tenants should I look for?
The type of tenant you choose depends upon your investment goals. Do you want reliable rent payers who may be more demanding when it comes to decoration and facilities, or are you looking for less demanding tenants who are more likely to stay in your property for longer?
Types of tenants include those who are employed, housing allowance tenants and students. The location you choose will also be influenced by the kind of tenants you want to attract.
Research the advantages and disadvantages of each kind of tenant and use tools such as Dataloft and Property Detective to help you to research the local demographics and amenities.
To spread the risk across your property portfolio consider buying properties that attract different types of tenants. For example, if you only own student property in a certain area what happens if the local university experiences a lull in students?
How can I get on the property portfolio ladder?
Start small and consider your first investment very carefully. When you have built your first solid investment you can start to build a portfolio. Begin by identifying investment opportunities with the highest likelihood of success and the lowest risk. When you are interested in a property offer below the asking price. Never offer more than you can afford or more than your research has indicated a property is worth.
A lower cost way to invest in the property market is through a real estate investment trust (REIT). REITs are run by managers who buy and sell property. The income generated from rental yield is then shared amongst the investors. Just like any other type of investment, property shares can go up and down. REITs can be held in ISAs and SIPPs (self-invested personal pensions), so they can be a tax-efficient way to invest money.
Why choose Insight Law buy-to-let conveyancers?
Whether you are an experienced landlord buying property to increase your portfolio or you are a first-time investor, our property solicitors can advise you. We look after every aspect of your property purchase or sale, making sure your experience is as straightforward and stress-free as possible.
Our conveyancers provide a full-service solution tailored to individual needs. We can advise on every aspect of your investments including financing, insurance, planning and tax. We help to ensure your property portfolio is a success by supporting you to meet your ongoing legal responsibilities as a landlord.
Call our specialist buy-to-let conveyancers today on 02920 093600.