How to build your property portfolio
- Red A troublesome property can be sold on and replaced if it does not perform as expected
- Amber A property portfolio spreads the risk of the investment over multiple properties
- Green Unlike many other assets, property may increase in value over time
Interested in growing your own property portfolio? Discover how to start and build a property portfolio with your Alternative Business Funding guide.
Why would you build a property portfolio?
To answer this question, first ask yourself ‘What is a property portfolio?’ A property portfolio is a collection of properties owned for investment purposes. It may be owned by an individual, group of individuals or a company.
The goal of building a property portfolio is to increase wealth and establish a source of income.
A property portfolio offers several advantages in achieving this aim.
Firstly, a property portfolio spreads the risk of the investment over multiple properties. If one property proves to be less profitable than expected, income (in the form of rent) from the other properties continue. The troublesome property can be sold on and replaced if it does not perform as expected. If a tenant does not renew their lease and a property is left empty for some time, the income from other properties can help cover the costs of holding that property.
Properties in a portfolio can be diversified. A mix of residential, commercial and industrial properties can provide a cushion against downturns for any particular type of property. Even if you stick to one type of property, such as residential property, you can buy property in different areas or different cities and at different price levels, ranging from student houses to luxury holiday properties.
How does a property portfolio work?
A property portfolio, whether managed directly by the owner or by a property management firm which attends to the day-to-day operations, is a service business. Tenants rent properties or flats to live in (for residential properties) or to house businesses (commercial and industrial properties).
The rent paid by tenants is the income for the business. Expenses, including mortgage or loan payments, taxes and maintenance come out of that revenue stream. The remainder is the profit.
Unlike many other assets, property may increase in value over time. Substantial price increases can result in significant profits if the property is sold. Even if you continue to hold the property you may still benefit from such increases by borrowing against your equity in the property. However, it is worth noting that the value of property may decrease as well.
How much does it cost to build a property portfolio?
The cost of building a property portfolio is highly variable.
The main costs involved in building a property portfolio is the cost of purchasing property. Depending on the type of property and location, this cost can vary from thousands to millions of pounds. This means that there are opportunities for a wide range of investors.
If an investor cannot afford to pay the full purchase price of a property in cash, they must also consider the cost of a mortgage, including interest and fees.
In addition to the cost of property, an investor may have to consider the cost of renovation or demolishing old structures and building new ones. Undeveloped property may also have the costs of building utility and road connections.
How do I start a property portfolio?
There is no single approach when it comes to building a property portfolio.
Purchasing a property can be expensive for an individual investor. Forming a partnership or company with like-minded investors can allow those with limited funds to enter the property market with a smaller investment. If doing so, it is important to seek legal advice from a solicitor skilled in property matters to review the terms of the venture.
Whether you are investing on your own or as part of a group or company, it is prudent to seek financial advice. You must determine if the cost of purchase, finance and upkeep can be reasonably covered by the rent you can charge. A commercial property in an unpopular area, for example, is worth less, as the rent you can charge will be lower than for a similar property in a popular area.
What type of security do I need for a property portfolio?
Building a property portfolio is likely to require some form of financing. It may be a mortgage on the property or a personal or business loan.
A good credit history is important in qualifying for financing and may allow you to negotiate better terms. However, when financing property, the property itself can usually be used as security for the loan. This means that the property may be seized if you fall into arrears.
When you are in the early stages of building a property portfolio, you may need to borrow funds to give you the liquidity needed to begin investing. You may use assets, such as a home, vehicle or business as security for such financing. Again, these assets may be seized if you fall into arrears. Such a default can also damage your credit history.