How to build a buy-to-let investment portfolio the easy way

Five rules that are the foundation of successful property investment

Buy-to-let investment can be a life-changing strategy. It has made millionaires out of hundreds of investors, and there’s no reason why you shouldn’t be the next. But this kind of success doesn’t happen overnight. You need to spend time and effort to learn the rules of the game.

Once you know the rules, you tilt the playing field in your favour. You’ll know which strategies maximise buy-to-let yield and cut the tax on rental income. And you’ll take a leap towards becoming the next property millionaire. The five rules you are about to learn are the foundation of success in buy-to-let investment.

1.      Find the best locations for buy-to-let investment

One of the big mistakes made by beginner investors is to limit their property search to near where they live. They think this will make their life easier, but it doesn’t. The best places to invest in property UK are rarely around the corner.

Buy-to-let investment is a lifestyle decision and a long-term investment. You should invest in an area where the fundamentals support long-term demand from renters and home buyers. People have basic needs, and they want to live where the local economy and infrastructure supports those needs. It means investing where there are shops, schools, transport links, major employers and major investment.

Now, it may be that your local town or city is undergoing massive regeneration and investment in infrastructure. It could be that this makes your local area one of the best for property investment. But can you be sure?

The UK property market is made up of hundreds of smaller, local property markets. When we discuss the UK property market, it is simply an amalgamation of all these local property markets – an average, and no more, no less. You may be tempted to invest locally because ‘the average UK house price is growing by 5.6% per year’. But in some areas property prices are falling, while elsewhere property prices are rising by 9% or 10%. If you invest locally, you may find you have bought in an area where house prices are falling. Do your research, and invest where the property fundamentals are strongest.

2.      Buy property at below market value

If you buy property at below market value, you increase your potential to profit. You also give yourself an inbuilt cushion should property values fall temporarily, and you need to sell.

The amount of discount you can negotiate depends on several factors, including:

  • The strength of the seller’s desire to sell. A distressed seller will be more willing to agree a lower price, as would a seller who has agreed to a purchase of a new home and needed to sell to move (or lose the home of their dreams).
  • Any issues that need fixing. For example, if the property needs new central heating, you may be able to negotiate a discount of more than the cost of a new heating system.

When deciding on market value, use all the research strategies available to you. Search local press adverts. Speak to local estate agents. Surf through the Land Registry website to view at what prices similar properties nearby have been sold. If you don’t know what property values are in the local area, how can you negotiate to buy below market value?

3.      Purchase buy-to-let investment property with above-average yield and good cash flow

If you want to invest for income, then you should be investing in properties with positive cash flow and a high rental yield.

To calculate cash flow, deduct all costs from your gross rental income. The costs you should allow for include:

  • Mortgage interest payments
  • Maintenance
  • Ground rent and service charges
  • Investment property management fees
  • Void periods

Let’s say your gross rental income is £1,000 per month, and your costs total £770 per month. You have positive cash flow of £230 each month, or £2,760 per year. Now, let’s say that the buy-to-let property cost £180,000:

  • The gross rental yield is 6.7% (£12,000/£180,000 x 100)
  • The net rental yield is 1.5% (£2,760/£180,000 x 100)

However, if you have invested using, say, £40,000 of your own money as a deposit (and financed your investment with a £140,000 buy-to-let mortgage), your real net yield is:

£2,760/£40,000 x 100 = 6.9%

Do you want to leave your cash in the bank earning next to nothing? Or is a return of 6.9% worth the time and effort you’ve put in to learn the rules of the property investment game?

(Of course, as with most investments, you may have to pay income tax on this rental profit. How much depends on how you have structured your investment and your tax rates.)

4.      Use property experts and professionals

You probably wouldn’t service your car. Nor would you replace your central heating system. You may have an accountant help with your annual tax assessment, and I expect that you used a solicitor or conveyancer to help you buy your home.

Why do you pay others to do so much for you? Is it because they are qualified and experienced in what they do, and they’ll do a better job than you? Saving you money, time and effort? Stopping you from making avoidable mistakes?

Surround yourself with property experts, who will be able to discuss the best investment strategies to meet your objectives. They will help you decide where to buy and source the best property investment opportunities in those locations. Use a suitably qualified and recommended solicitor who should make sure that contracts are watertight. Benefit from a buy-to-let mortgage broker, who should get you the best financing deal. Hire a good accountant, who should help you minimise tax liabilities.

5.      Outsource the management of your buy-to-let investment

You’re an investor. You’re probably also a very busy person. Who isn’t these days? A primary reason for most for investing in buy-to-let is to create a second passive income stream. It will allow you to take life a little easier. Deciding to be a DIY landlord simply adds more work to your already crowded lifestyle.

Using an investment property manager ensures that you benefit from income produced from your buy-to-let investment, without spending hours each week chasing rent, inspecting properties, and carrying out repair and maintenance work.

Property investment is a long-term strategy to build wealth slowly and steadily. However, sticking to these five rules should help to accelerate the speed at which you build a profitable buy-to-let portfolio. You’ll avoid rookie mistakes, and invest like a pro. Contact one of the Gladfish team today on +44 (0)207 923 6100, and we’ll be pleased to discuss strategies to take you from zero to property hero.

Live with passion,

Brett Alegre-Wood

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