Landlords & Your New Portfolio

Navigating your way through the buy-to-let market

1. Introduction

At Rentify we know better than anyone the great rewards that a well thought-through property portfolio can bring to landlords. That's why we're bringing you this guide: to help you build one that's right for you, whether you're a first-timer looking for a new investment or a budding buy-to-let property magnate.

In recent years there has been a clear cultural shift towards renting in the UK , which is showing little sign of abating. If you do your homework and are well-organised, there is little reason why your rental business should not continue to grow, however small or large your ambitions. The benefit of investing in a buy-to-let portfolio is that, unlike a saving account with a set rate, it gives you some control over the return on your investment.

For those with the capacity to do so, expanding a portfolio is a great way to minimise risk and limit the impact of any void periods on your cash flow. You will also pave the way for higher long-term profits as, despite the odd blip, property will always tend to rise in value if you keep hold of it long enough. Of course, these benefits will only come with sound financial planning and property management so make sure you seek expert advice for whatever course you are planning. This guide should help you a lot, but it is just a guide!

We understand your time is valuable. If you’re overwhelmed with managing your property, we can do it all for you through our let my property or full management services or call us today on 033 3014 8505.

2. Laying the Foundations

Whether buying your first or fifteenth property, the starting points are always pretty much the same. How do I find the right property for my needs? The only way you can build an extensive portfolio is with a solid foundation, so make sure you get it right.

Preparing yourself

While it's true that markets are on the side of landlords at the moment, this doesn't necessarily mean it will all be plain sailing. Planning and organisation are key. Even before you start looking for a property, you must know in advance what you are hoping to achieve and what you will be able to afford. Take into account the following questions and suggestions:

Who do I want to rent to?

  • Students: a good idea near university campuses as there should always be a large market and the yearly schedule should be fairly stable and predictable

  • Families: a good idea near schools; they're also unlikely to be too transient

  • Young professionals: a good idea in cities or near commuting links; they tend to have stable incomes and be clean and tidy

  • Retirees: perhaps in quieter areas; like families, they tend to stay put.

What's your focus: high net rental yield or capital growth?

  • Net yield is essentially the return you get from your investment into the property. It's calculated by taking the annual rent you receive less any direct costs (e.g. letting fees) and dividing this total by the purchase price of the property

  • For example: If you purchased a property for £200,000 and receive annual rent of £13,000 in rent of which £1,500 goes to direct costs, your net yield will be (£13,000-£1,500) / £200,000 = a net return (yield) of 5.8%

  • Capital growth is more about the long term: it's the increase in the value of your property portfolio over time. You will, however, have to pay Capital Gains tax on any growth if and when you come to sell the property.

  • The reason (generally speaking) why you it's hard to find a property that achieves both is basic desirability. A property that's going to have strong capital growth will usually be a more expensive, more desirable home with higher loan repayment rates, requiring higher operating costs, all of which will cut into rental yield. A property that produces higher rental yield tends to be less desirable to purchase as an owner-occupied home. Its capital growth will not be as high purely because fewer people want to buy it.

  • Perhaps consider a long-term strategy that combines both methods: many landlords get dragged too far towards one and forget the benefits of the other.

Where am I going to incur substantial costs?

  • You'll be looking at spending a couple of thousand on fees for lawyers and mortgage lenders during the purchase of a property. You'll also need to pay for landlord insurance

  • Even if no repairs are needed, it's highly likely that you'll need to decorate the property to bring it up to good letting standards so you can attract the right tenants. And tailor the décor to your target tenants. Those beige walls aren't going to paint themselves...

  • Once purchased, you should also get a professional electrician, gas safety expert and plumber to look over the property. You'll need an Environmental Performance Certificate (EPC) and should consider getting a professional health and safety assessment. All of this will set you back a further few hundred pounds

  • Repairs may be needed on the back of these studies, so you'll need to have some money set aside. In any case you'll need this (and more) for the ongoing maintenance and improvement of the property

  • Stamp Duty Tax is payable on all land purchases, starting with properties costing £125,000 and over

  • You may use a letting agency to cover some of the leg-work but most will charge at least 10%, going upwards of 15% if you want a fully-managed service (But Rentify will manage all aspects of your property for £80 a month)

Make sure you know exactly where your money is going and don't be shy about questioning lawyers or lenders about any fees that have not been well explained.

Proper insurance is a must if you are serious about building a portfolio. Rent guarantee is especially vital as it will guarantee income in the event of rent arrears, Watch out though: it may come with provisions about the type of tenant you can let to...

You'll only have a good idea of where to start looking, and what to start looking for, when you have an answer to all of these questions. Make sure you are pretty certain: it'll save you time and money in the search. With a clear idea of what your plans are you are much more likely to make a success of your rental business from the get-go.

Location, location, location

The next step is to start looking for the right location. These tips should help you find the right place for your requirements:

  1. If it's suitable, try to find a property in your local area. Not only will you have a good idea of prices, amenities and the best streets (including 'hidden gems'), but having a rental property nearby means you can take a more active approach in managing the property. This will be a great reassurance for potential tenants.

  2. Whether on your own patch or not, get advice from local agents on the type of property that will let quickly, given your desired tenants, and on what you can do to achieve the best rents.

  3. Keep an ear to the ground for major transport or infrastructure developments and look at areas that could well be positively affected. Likewise if you hear of any major localised employment opportunities like a factory opening or new business park, take a look at nearby properties.

  4. If you are going to let to students, try to stay ahead of the curve on any new campuses being built.

  5. Consider the potential of a cheaper, less popular area which is next to a much more expensive, popular one. While the old adage that the worst property in the best area is better than the best in the worst area still holds true, it may be that a worse area is soon considered part of a better area if they're neighbours.

  6. Conduct your own market research. Remember all the while that you're ultimately looking for a property for your preferred type of tenant, not for yourself. Find out:

  • Which areas rent out quickest (this will help limit void periods)

  • What type of property in those areas is most popular (flats? Detached houses? Terraced houses?)

  • What the market rent for the area is (you might eventually use this knowledge, if needed, to advertise a slightly lower rent to generate interest from tenants)

Finding the property

Once you're sure of the area in which you would like to buy, you're going to need to take the plunge and find, and ultimately commit to, a property.

If you're keen on expanding in the future you may want a property that has some potential for capital growth so you can borrow against the value increase. We looked at how such properties are often the more popular properties but if you've done savvy research you may also be able to generate good capital growth in the long-term by buying below the market rate. Where should you look?

  • Through estate agents (online or in shop): the most obvious and generally most fruitful way forward

  • Auctions: these can be great for picking up a bargain but you must have all of your finances in order on the day. Also, you should have already looked over the details and had them approved by your solicitor.

  • Repossessions

  • Through a property finder (who will usually charge around 1% or 2% + VAT )

  • Local newspapers and web-sites: pretty old school but you may stumble across an unexpected bargain!

Once you have located a property that matches your criteria, don't get too excited. Try to look at it critically.

  • If the value seems too good to be true, it probably is. Don't start convincing yourself that a poor quality property is a good deal just because you want to get the ball rolling

Don't be afraid to negotiate on the price. If you are buying-to-let, you will not (usually) be relying on the sale of another property to fund your purchase. Consequently, from their point of view the sale is less likely to fall through. This makes you an attractive buyer and people may well be willing to haggle when they know you're serious.

Keep a lookout for motivated sellers who are looking to get a property of their hands quickly and willing to sell for less than they would otherwise.

Financing & applying for a buy-to-let mortgage

If you are thinking of building a buy-to-let portfolio it is probably safe to assume you have a bit of money saved up for the purpose. Still, unless you are super-rich it's very likely you will need funding from a buy-to-let (BTL) mortgage.

If you are converting your own residence into flats, you must inform your lender of the change of use: you will not be allowed to keep your owner-occupier mortgage going on the same terms.

Features of a buy-to-let (BTL) mortgage:

  • A BTL mortgage is money borrowed to buy property to rent out

  • It's similar in principle to a typical mortgage for owner-occupied property with three main differences:

  1. Lenders primarily take potential rental income into account when deciding how much to lend (though they'll probably lend more if you have other earned income)

  2. BTL mortgages tend to be more expensive due to a perceived higher risk: you'll need a larger deposit and probably have to pay higher arrangement fees

  3. BTL mortgages are usually on an interest-only basis. This means your scheduled repayments only cover the interest accrued on the loan

  • Like a typical mortgage, a BTL mortgage can come with a fixed rate or as a tracker

What are the pros and cons of BTL mortgages being interest-only?

PROS The monthly payments are very manageable and easily covered by the rent with profit to spare.
CONS Well, you're not actual paying off the mortgage with each repayment, and when the mortgage comes to an end, you'll have to pay back all of the capital. Of course, you can do this as you go along if you come into considerable money (such as a bonus or inheritance) and you'll be fine if you can save up towards this as you go. This is a big reason why you must really focus on getting as much rent as regularly as possible. But obviously it's going to be a large whack and if you have only looked to the short-term you'll probably be forced to sell the property. Alternatively, and probably most typically, you will have planned for the payback of the capital and the sale of the property to do so, having already invested in a new property or new properties by this time.

What are the requirements for getting a BTL mortgage?

  • Most lenders now will require rent to cover 125% of the repayments. So if you have to pay £500 per month in (interest-only) repayments, you'll need to bring in an absolute minimum monthly rent of £625

  • Most lenders have a maximum loan to value (LTV) of 60-75% i.e. they will only lend you a maximum of 60-75% of the value of the property. You'll have to fund the remainder yourself so make sure you have done the maths

  • You will have to put down a (probably hefty) deposit: some lenders demand as much as 25%+

How can a landlord (or prospective landlord) ensure they get the best deal on a BTL mortgage?

  • Shop around. Again it may sound so obvious, but you'll soon see it's worth it, especially if you can show lenders that you can get a better deal elsewhere

  • Consider using a specialist buy-to-let mortgage broker. You'll be under no obligation to sign up to what they offer you and their advice and know-how could be invaluable to you in understanding what you can afford

Don't overstretch yourself when it comes to borrowing. For example, if you're not comfortable with large borrowing, consider making a 65% LTV your absolute maximum.

A mortgage lender's valuation fees will usually have to be paid up front but you may be able negotiate other fees, such as the lender arrangement fee, into the loan.

3. Building on up

Once you feel comfortable in your role of landlord and have mastered the art of finding tenants, keeping cash flow steady and managing the property, you may well turn your attention to expansion. Not only will you have a much better general idea of what works for you, hopefully profits and capital growth will also have given you the sound financial footing for the next step.

We have made this sound rather easy, of course! You must again make sure you take appropriate expert advice before continuing. Call Rentify to discuss any issues.

Purchasing new buy-to-rent properties

There really is no quick trick or secret revelatory wisdom that will instantly get your portfolio to snowball. All of the other advice we have discussed on finding the right properties and securing financing still applies.

The only change is that you should have gained experience and managed your profits and any capital growth wisely to help you when you purchase your next property. For example, you can use the increased value of your first property to help finance the next. Remember that a lender's primary focus when deciding how much, if any, to lend to you, will be the rent that you are going to charge and not necessarily your other income.

If you have to borrow against the value of an existing property, be prepared for higher mortgage payments and make sure you can cover them.

Say you bought your first property with a £25,000 deposit and a BTL mortgage of £75,000. Imagine the property has now increased in value from £100,000 to £150,000: you can use the increase of £50,000 as a deposit for your second property. 

What tactics should I employ if I have a substantial sum to invest in buy-to-let?

  • It will depend on your character and what you're comfortable with, but it's a good idea to strike a balance between trying to limit borrowing and spreading your risk by investing in as many properties as possible

  • For example, if you have £200,000 you may simply decide to buy a £180,000 property outright to avoid any borrowing, keeping back £20,000 as a safety net and to use for initial repairs and decorating. All the rent will go straight into your pocket (less any management fees)

  • But in fact it would probably be a much better idea to use the money you've raised to buy two or even three £200,000 properties

  • Say you invest in three; you can invest £60,000 in each and borrow the rest at 70% LTV (£140,000 for each). Thus in total you have invested £180,000, leaving that £20,000 safety net.

  • You will be much more likely to get higher overall profits with three properties rather than just one as the capital on each appreciates (the property values increase). You will also have greater protection from any void periods in a property as you'll likely have cash-flow from the others.

  • If you are comfortable doing it, you may even try borrowing 75% LTV (£150,000 for each), so only having to invest £50,000 in each. The interest payments will be a little higher but in the long-run you should get a better return on your investment as you will have invested less but the value of the property will have increased by the same amount

This is all hypothetical, of course. Property prices can go down as well as up. This is why it's essential you look at all the facts, your own situation and then do what you are most comfortable with.

Of course there are many types of loan and intricate financing methods for purchasing property, which we do not have the space to cover here. Some may be good for you, some may be catastrophic. You really must speak to a finance expert who can work out what's best for you. It cannot be emphasised enough that you need to have done your sums properly and thoroughly. Rentify can point you in the right direction so do give us a call!

Some final words of advice

Stick to what you know

If you're having success with one type of rental and see no reason why it should not be sustainable, it's probably best not to change a winning formula. You'll continue to develop your expertise and you'll have the peace of mind that comes from a secure model.

Do you have the time?

Don't forget that if you do have early success, a certain part of it will be down to the amount of time you were able to spend on just one or two properties. Sure, your expertise will develop but the amount of time you have will stay the same! You may have to bring in a letting and/or property manager, which of course means increased expenditure.

Never lose sight of the worst-case scenarios

Sorry to bang on about it but you need to make sure you are covered. Make a list for when you are budgeting so you have a rough idea how much to keep back. For example, it is recommended that you factor in two months void period per year.


Make plans well in advance in case you ever wish, or are forced to sell a rental property. Consider Capital Gains and Inheritance tax so when you sell, it will be in the most tax efficient way possible. For example, if you make a rental property your main residence for even a short time, you can make large savings on Capital Gains tax. See Rentify's ' Landlords & Maximising Your Property ' for more good tax tips.

It should be clear by now that the overriding message of this guide is that short-term thinking in the buy-to-let world could have ruinous consequences. Planning is everything!

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