Why You Should Start a Property Portfolio
Are you looking to start a property portfolio? With the private rented sector growing at an unprecedented rate and living costs increasing year-on-year, there’s no surprise that more and more people are looking at property to secure their future.
- Nearly 40% of landlords own between two and four properties, representing 31% of the private rented sector
- Every investment in a portfolio should be chosen because of: Location, Tenant Demand and Past Performance
- Void periods are the biggest concern of a portfolio investor – take steps to mitigate them early
- Have an end goal in focus and stick to it
According to the English Private Landlord Survey last year, 38% of respondents owned between two and four properties, representing 31% of the private rented sector as a whole. Just 17% of landlords own five or more properties that make up a much larger 48% of the rental market.
Building a property portfolio is a long-term project and should not be rushed. It’s vital that you move at your own pace and grow your property portfolio in a way that is sustainable.
What follows are some of the most important considerations that you should have in mind when starting a property portfolio.
How to start a property portfolio
The logical first step is to consider your goals and limitations. As with any property investment strategy, you should consider where you want to be in a set amount of years (let’s say five for argument’s sake). How are you building a property portfolio – are you looking for rental income or capital appreciation? Do you want both? How many properties are you looking to have within your portfolio? Will you focus on one region or purchase several properties in several locations?
These questions can all make or break your investment portfolio and should shape each decision you make. The answers to these questions will determine your first purchase and the direction you move in after that.
Every investment in your portfolio should be guided by several important factors: Location, Past Performance and Tenant Demand. Location feeds into both tenant demand and past performance hence its importance. Picking the right location will be the deciding factor in the success you find as an investor – do you want to target city-centre tenants with high-rental income and demand but more expensive initial investment or opt for a more affordable initial cost outside of the city that will appeal to commuters?
Past performance and tenant demand are fairly self-explanatory but equally important. This research will allow you to discover how other investments have performed and what you can expect – an important angle when considering your strategy. Be sure to read up on yields and projected capital growth so that you can build upon it going forward.
Tenant demand will help inform the final part of your strategy and the demographic you’re hoping to target. Some investors will be looking at young professionals while others might be considering appealing to students. Ultimately it’s down to you but ideally, you’ll have the ‘perfect’ tenant.
Once you have a property in mind, do the necessary maths. Ensure that your past performance and projected yield data match up so you can set the correct level of rent. Generally, investors will use the rental income to pay off the mortgage, making smaller returns in the short-term but benefitting in the long run.
This means that typically, you’ll only need a deposit per each property in your portfolio, allowing you to scale at your own pace.
How to grow a property portfolio
Once you have several properties under your belt, the most important thing you can do is to consider your key metrics – does your rental income cover your mortgage payments? Are they still providing a reasonable return? Are you able to cover void periods?
These are all vital to track and will give you the best idea of how the portfolio is doing. The best way to see performance is with pure data and these metrics are the most important in relation to a scaling property portfolio.
Also, remember your tenants! If you’ve chosen the right tenant, you should have minimal problems but regardless, ensure you’re attentive and helpful. By keeping tenants happy, you can maximise tenancy lengths and minimise any void periods.
Void periods, the time when you have no tenants and thus no rental income, is your biggest concern when you have several properties as they can quickly spiral out of control and start affecting your cash flow across the portfolio. Hopefully, your research has ensured that voids are infrequent. If you do have to deal with them, it can be a good idea to keep any extra earnings from rental income aside to keep up with payments.
Finally, remember your end goal and keep an exit strategy in mind. If you’re looking for a sustainable, comfortable retirement, there may not be an end goal other than maintaining a solid stream of rental income. If you’re more interested in immediate wealth generation, you may be looking to sell for maximum capital growth.
When starting a property portfolio, be sure to have your goal in focus to stay motivated.