One of the most common things we get asked by newer investors is how to effectively scale a property portfolio.
It’s arguably the most difficult part of the entire process – things can quickly go wrong if you take on too much or struggle to sustain your existing properties.
The thing is, once you have several properties under your belt, it’s also the best time to start looking at expanding. You’ll have momentum on your side and the potential to leverage your existing properties to start building out a portfolio.
This is why we’ve created this blog on how to expand a property portfolio, ensuring you’re doing so safely and effectively.
How to Expand a Property Portfolio
While there’s no exact science to this process, it all depends on your circumstances after all, below are several tips that are fundamentally useful.
Measure your metrics
Firstly, you’ll want to make sure that you’re effectively and accurately tracking your key metrics. This means looking at your rental income, your yields, how much you’re spending on overheads such as maintenance and what’s available for you in the future.
The main thing is whether your rental income is still covering your mortgage payments. This is the baseline safety net you need to maintain. If you’re covering your mortgage and still making profits? Even better.
Remember to take into account any potential additional fees, such as ground rent or service charge, and work out both your gross and net rental yield. At the same time, research the local area and take a look at the average yields similar properties are earning – this is a great way of measuring your success.
Take things slow
You don’t want to take on more properties than you can manage. You want to start small and stay patient – a consistently positive cash flow is much easier to reinvest over the long term.
This is especially true if you’re in a position where you’re able to rebuild your deposit pots with rental profit. It’s much better to wait and build a deposit slowly than to rush into a purchase and potentially hurt yourself financially.
Taking a slow approach also means you’re less likely to invest with emotion, which is usually a recipe for disaster. It’s always a better idea to invest with reasoning, backed up by solid data.
Always look to diversify
When you’re scaling your portfolio, you want to diversify at every possible opportunity.
This means investing in several different locations and choosing several different asset types. For example, you might have several traditional lets and a student let, as this allows you to target different demographics and means you’re not beholden to one tenant market.
It also means you’re able to leverage several different strategies. Renting to students, for example, is a seasonal market that offers consistent returns over certain months. If all of your properties are leveraging this one market, you might find you’re experiencing void periods at certain points in the year.
Always think long-term
Property is inherently a long-term game and it requires a long-term strategy. Every decision you make should take into account at least the next five years, if not 10 or 20. This is because as your investment delivers returns over such a long period, it starts to benefit from compounding interest, alongside capital growth.
At the same time, don’t be afraid to opt for quality over cost. While it might seem like a big outlay at the beginning, over time, quality always shines through. A cheaper product may deteriorate faster or struggle to stand out in competitive markets where better developments are providing tenant amenities or more desirable interior design.
Consider a limited company
If you’re serious about building a larger property portfolio, there’s always the option of doing so through a limited company. Structuring your portfolio within a business offers several advantages, including limited liability, tax advantages, flexibility and a much simpler process when it comes to transferring assets.
That said, it’s a complex process and can mean both higher costs and difficulty in securing a mortgage.
As always, this is not financial advice, and it’s critical to speak to a financial advisor when considering a process like this, as if it’s done incorrectly, it may hurt your ability to invest in the future.
Sustaining a Property Portfolio
When you’re investing in a portfolio, the most powerful tool you have is time.
Property benefits from being part of a long-term strategy – just consider that historically, UK property has doubled in price over the last two decades.
Ideally, when you begin building a portfolio, you’ll have a holding pattern in place already, whether this is ten years, fifteen years or even longer. Having a figure in mind means you’ll be better informed in the future, whilst ensuring you’re making decisions based on long-term statistics.
Something else you might want to consider is consolidation. This is generally used to manage multiple properties and involves wrapping loans or repayments into one, meaning you have a better idea of what you’re paying and when.
At the same time, it’s a good idea to have a ‘rainy day’ fund that you can dip into at any point. Property inevitably comes with unseen costs, such as unexpected maintenance, and having a fund to deal with this is always advisable, rather than using important rental income. At the same time, this fund can mitigate void periods, which are painful on a single property but become a disaster across an entire portfolio.
