Building a Buy-To-Let Investment Portfolio

We have all watched those property programs on television where people seem to have built large portfolios of buy-to-let properties seemingly with little or no no money. Just how did they do it? In this article will show you the main strategies for acquiring property and building your very own portfolio and minimising your cash outlay.

The very first point to note is that you cannot start your property portfolio with absolutely no money. You will always have to pay a potential mortgage lender the cost of a valuation and their legal fees upfront, but other fees such as the lender arrangement fee can usually be added to any loan. If you are buying at a property auction then you will have to put down a 10% deposit on the day the "hammer drops". Having said that, if you "do" buy well and below market value then you have to the potential to recover that initial outlay and possibly more!

Where to Start?

Your first major decision is where to buy your first property and the easy answer is, somewhere close by, i.e. your home town or outlying villages. The second decision is, what to buy? Again, this answer should be fairly simple; you will not be targeting higher value properties because the rent on say a £500k mortgage will almost certainly not be enough to cover any interest. This means that you should be aiming for the lower to mid end of the market and you will almost certainly know where these areas are in your town or city. We'll cover more on this in a moment when we will go into market research. Purchasing and reading a good property investment book may be worthwhile and joining a local property networking group would definitely be worth investing time in, even if you have to do a little traveling. Meeting with other like minded individuals and finding out about their experiences may reduce the risk of making a major mistake!

Market Research

Your first "port of call" in your search for a rental property will be your local weekly paper advertising property for rent and for sale. Scanning the rental property you can quickly gain an insight into achievable rents for various types of housing the areas they are in. You can then look in the property sales sections and see the likely values of property in those areas, if you are lucky you will be able to compare prices of similar houses where they are in "pristine" condition and those "in need of modernisation", although it may take some time to build up a picture just using your local newspaper. Of course you can do this local research on-line too these days using one or more of the property selling websites. Using these sources you should be able to build up a basic picture of your local property marketplace, but your next move will be to visit a number of local estate agents and start building a more complete picture and confirmation of your own initial research by asking them questions like:-

• Which are the best areas to rent in?
• Which areas would you avoid?
• Which areas rent out quickest? (You need to minimise those times in-between tenants as no rent means you have to cover the interest payment!)
• What type of property is best to rent out in those areas? Examples are bed-sits, flats, terraced or semi-detached houses.
• What kinds of rents per month are achievable in those recommended areas and for the properties.

At the time of writing a number of specialist buy-to-let mortgage companies are not lending on new properties and some areas are definitely suffering from an over supply of flats, in particular new flats that were bought / sold at what many think were inflated prices, so you should make sure you really know your target market place before buying. You should now have a good idea of where & what to invest in within your local area, so let's move on to the next stage.

Hint: You should never rely on information supplied by anyone with an interest in the sale, always do your own independent research, it is always worth the effort and could prevent costly mistakes!

How to find your buy-to-let properties?

You have already met with various local estate agents, so now you should establish a relationship with the best of them and register your interest in the areas & type of properties you intend to invest in. Ask them to contact you when suitable properties become available. Some potential sources of investments properties include:-

• Auctions note:- local properties do not necessarily sell in local auctions
• Estate Agents, online and off line
• Weekly Papers advertising local properties for sale
• Property Finders (they will charge a fee 1%-2% + VAT)
• Repossessions
• Motivated Sellers, looking to move quickly

Investors short of cash or just starting out are probably best served by avoiding ex local authority houses and licenced Houses of Multiple Occupancy as fewer lenders are available, plus loan ratios can be lower than standard lettings. If you are lucky enough to source a property discounted by more than 17%-18% of open market value then you may even be able to withdraw equity after expenses.

Portfolio Building Strategies

Buying an investment property below market value or with the possibility of adding value should be your main aim. Your profits are usually determined by the price you pay! Each of the options below are valid ways of building a portfolio, you can mix and match some elements, but as you go down the list more money is required!

1. Buy with a "gifted deposit" from the vendor or developer, some lenders allow between 5%-15%, which could leave you with just the valuation & legals to pay.
2. Buy a property below market value, purchase via a "one day bridging loan", remortgage on the same day and hopefully recover your costs or even withdraw equity.
3. As in option 2 but buy at auction or via a property finder.
4. Mortgage a property at 85% of purchase price, pay to refurbish and remortgage within 3 months at the new open market value. This option is for light refurbishment, i.e. new bathroom, kitchen & decoration.
5. Buy via a 100% property development loan then renovate, convert to flats etc and remortgage on a buy to let when finished at the new open market value. Note: Gross Profits of 25%-30% possibly more needed. This is typically not a start option, although it is possible!

In a short article like this it is impossible to cover all aspects, remember this is just the basics!

Basic Mortgage Loan Ratios

Typically you can mortgage your property purchase at 85% loan to value or 85% of purchase price which ever is lower. Monthly rents generally need to be 120%-130% of monthly interest payments, however these limits can be stretched but not without cash, i.e. it could take your between 3 & 6 months to withdraw your equity at higher levels of gearing.

Does the deal work?

All figures are assumed for the purposes of this exercise which is to demonstrate how a purchase might work; actual figures will vary with local conditions, interest rate movements, lender criteria which change from time to time. Here is a worked example of a below market value purchase and buy-to-let remortgage, that has not been sourced at an auction or via a property finder: -

Assumption: You have found a below market value property with no need of refurbishment that qualifies for an immediate remortgage and therefore possibly instant equity withdrawal. This example needs low cash input which can be withdrawn when your mortgage completes, say 4 weeks with a total cash requirement of circa £2,400.

• Example Purchase
• Open Market Value: £100k
• Purchase Price: £80k
• Mortgage Loan: £85K e.g 85% of open market value.

• Example Costs:
• One Day Bridge: £1600 (used to complete the purchase, fee paid by immediate same day remortgage)
• Legals: £350 (up front fee to bridging lender)
• Mortgage Valuation: £500 (up front fee to mortgage lender)
• Legals: £350 (up front fee to mortgage lender)
• Total Costs: £2,400

Rental Cover

We'll assume local rents will cover your Buy-to-Let mortgage but here is a rental example:-

• Mortgage Interest: £5,100 per annum or £425 per month (assumed interest rate 6%)
• Rental Cover: 125%
• Rent Required: £6,375 per annum or £531.25p per month

The Calculation

• Mortgage: £85k less
• Purchase Price:£80k
• Surplus: £5k less
• Costs: £2,400
• Capital Raised: £2,600 post remortgage
• Return on Capital employed = £2,600 / £2,400 * 100 = 108% (i.e 8% in the time it takes to remortgage!

Investors have successfully used this method, however lending criteria do change from time to time so there can be no guarantee this method will work in the future or that the deal you have identified works for the above example. To calculate the cash requirement of other options, just replace the relevant costs and recalculate. If you happen to live in a low cost area with access to really low value properties and therefore higher rental yields, then building that portfolio at speed is a real possibility! Before commiting yourself, contact your financial advisor or ourselves for an assessment.

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