As the UK emerges from recession and the property market begins to pick up, many buy-to-let investors are considering expansion. Many of those landlords that had safeguarded and properly managed their investments have survived the downturn, and a large number of them have actually flourished in the adverse conditions. Now, as activity in both the rental and sales markets is stabilising, expanding a portfolio looks realistic.
Some analysts and commentators have suggested that the buy-to-let ‘boom’ is over. Certainly, inexperienced investors who fail to do their research are likely to find the current environment difficult. But, if you have an existing portfolio and some money to spend, now may well be a good time to build on your investment.
Why should you expand your portfolio?
The biggest profits only come as a result of expansion. As you expand your portfolio, your profit-making potential increases; an investor with ten properties has twice the profit-making potential of an investor with five properties.
A larger portfolio also allows you to spread risk more effectively. Void periods can be financially crippling if you rely on a single property, but the associated risk drops exponentially with each addition to your portfolio. You may also find it easier to secure credit with a larger portfolio, as you will have more collateral against which to secure loans.
What are the risks?
It is important to note the dangers associated with expanding a property portfolio. As with any business venture, if you grow too quickly you risk jeopardising your financial security.
Many investors finance their second purchase by re-mortgaging their original property. While this can provide a good opportunity to release cash from an otherwise liquid asset, you should remember that doing so can cause cashflow problems and could jeopardise your ability to get a good mortgage rate later on.
Your monthly payments are likely to increase if you re-mortgage your property, meaning that the rent may no longer be enough to cover your outgoings. At the same time, you are highly unlikely to be able to find tenants for the second property immediately after purchasing it. You must therefore ensure that you have enough cash to cover the shortfall in rent on your first property, the mortgage payments on your new property, and the cost of bringing it up to scratch.
Your workload will also increase as your portfolio expands. All of the properties will need to be maintained, rent will need to be collected, and tenants’ queries will need to be addressed. As their portfolios expand, many investors choose to take on the services of a property manager – particularly if they also have another job. The management of a growing portfolio quickly turns into a full-time job, and you may therefore need to bring in extra help to ensure that you keep on top of it.
Choosing the right properties
Your property choices will have a significant impact on the success of your portfolio. So what should you be looking out for when choosing properties to expand your investment.
Price will obviously be a crucial factor in any investment decision. You must ensure that you do not overstretch yourself financially. If you will have to borrow against the value of your existing property, make sure that you will be able to cover the higher mortgage payments.
Location becomes even more important as your portfolio expands. If your properties are spread out across the country, will you realistically be able to give each the attention that it needs? If not, you will need to look closer to home or hire a property manager – the cost of which must be factored into your considerations.
If you are branching out into a new area or location, make sure that you do your research in advance. Find out what sort of rents are being achieved for similar properties in the area and, if necessary, speak to some local agents to find one with whom you would be happy to work.
Quality is another key concern. Do not rush into buying a substandard property simply because now seems like a good time to expand. Make sure that you perform sufficient ‘due diligence’ on the property. Get a trusted surveyor to look around in order to alert you of any potential problems.
Despite the vagaries of the property market, the current environment is likely to be a positive one for many buy-to-let investors. If you have some cash to spend and are looking to increase your profit-making potential, now may well be a good time to consider expanding your portfolio.
But you should make sure that you do not rush into a purchase – and that you do not jeopardise your financial security by growing your business too quickly.