Finding, purchasing and managing a single investment property can be a huge challenge. So how do those who invest in multiple properties both grow their portfolios to a large size and handle the stress of managing each property along the way?
Growing your portfolio
Many property investors start small, taking on only one property that they can manage alongside a day job. This single property may be taken on to subsidise existing income, or in order to achieve a future financial goal, like funding retirement.
Some investors, however, find that they enjoy the property game and decide to expand their portfolio to include multiple and varied assets. Usually, this involves cashing in the equity that’s been built up in an original investment property in order to raise the capital needed to fund the deposit on another.
This is a type of gambling, but one with calculated risks, and it’s a strategy that has seen many everyday investors create large and impressive property investment businesses, often giving up their day jobs to concentrate on bricks and mortar investment.
If you decide to grow your property investment portfolio, don’t try to run before you can walk. Exercising caution is preferable to over-stretching, as the property market is often volatile.
As you grow into multiple properties, try to avoid cross-collateralisation, that is, borrowing against the value of multiple properties at once. If you find yourself unable to meet repayments, cross-collateralisation might lead to you being forced to sell multiple properties, in order to pay off just one loan.
It often pays to spread the financial risk by investing in different geographical areas, different types of property and for different markets (e.g. student rental, private rental, commercial). This will ensure that you haven’t put all of your eggs in one basket, should one part of the property market take a knock.
Get some help
On a practical level, owning a number of properties in far-flung areas might make it necessary for you to invest in a property manager or letting agency, to help out with practicalities. Managing multiple tenants, from a distance, is no mean feat – and nobody wants to drive 200 miles, at 2am, to deal with a burst pipe.
There are typically two options when hiring a lettings agent: let only and full management.
A let only agreement is the cheaper option of the two, and will see an agent advertising your property, finding tenants and collection the rent each month. This usually sets you back around 11 per cent of your annual rental income.
A full management agreement will see the agent taking care of everything, from finding tenants and collecting rent to handling repairs and maintenance, chasing up unpaid rent, carrying out property inspections and dealing with emergency situations, such as burglaries or burst pipes. This type of agreement usually costs around 17 per cent of your annual rental income.
Handing over a proportion of your investment return may seem painful at first, but the peace of mind afforded by the services of a good letting agent should not be underestimated, particularly if your properties are spread over a wide area.
Paying letting agents to take care of the day to day running of your property empire will also free you up to concentrate on strategic planning and financial management. It will also remove distractions, allowing you to fully focus on business development.
As your portfolio grows, the finances of your operation will become more complex. For this reason, it may be prudent to invest in the services of a competent financial adviser, who can make sure that you have information about, and access to, the best borrowing deals.
Signing up with a good accountant will also ensure that you run your property portfolio along sound business principles, helping you to handle issues like cash flow projection and rental yield calculations.
As the owner of multiple rental properties, it’s crucial that your financial records are accurate and up-to-date. A huge amount of transactions will happen each month, with payments going in and out for rent, repairs, maintenance and help with managing properties. An experienced and trusted accountant may be a great investment, particularly to help keep your tax returns under control!
As your portfolio expands, strategy will also be more important than ever, as you will need to make systematic, targeted purchases, rather than impulsive decisions. A skilled accountant will also help you to track maintenance costs, which will increase exponentially alongside the number of properties you own.
Buying in bulk
A great way to grow your property portfolio is to buy in bulk, particularly at auction, where groups of properties are often sold at great prices. Many auction properties need a fair amount of work, something which is off putting to many buyers. If you’re prepared to put in some time and effort, however, you can pick up bargains that can be quickly turned into great rental earners, with the assistance of an experienced builder.
When viewing auction properties, it’s also a good idea to take that experienced builder along with you, to give you an idea of the potential costs of renovation work (which you will need to factor in to your offer prices).
Finding a trustworthy builder, and making contacts at the local auction house, can help you stay abreast of the great new properties that come onto the market, as can keeping in regular contact with your local estate agent.
Remember that your finances must be in place before an auction purchase is made. Speaking with an experienced and trusted mortgage adviser well in advance of an auction will help you find the best borrowing deals for any properties you plan to purchase.
Remember your exit strategy
It’s all too easy to get caught up in growing your property portfolio and forget why these investments were originally made. Keep reminding yourself of your ultimate goals. Perhaps you bought your first property to fund a great retirement, or you planned to liquidise your assets in a decade, to buy a place in the sun and give up your day job.
Keeping in mind why you became a property investor will help you remain focused, motivated and organised as you grow your business.