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Building a Property Investment Portfolio

Why Expand Your Portfolio?

There are several reasons for this. Primarily you will increase your `property profit potential' at the same time as spreading your risks across a number of different properties that are successfully being rented out. The tenants are paying the mortgages, while the properties are increasing in value.

Example

With the £42,500 you buy two properties for £125,000 each. Let's do the sums as before:

All the criteria are met for the mortgage lender, both properties have been cosmetically improved and are soon tenanted.

Flash forward

It is now three years since you bought the two properties. Again you made wise choices and the value of the flats has increased. The average capital gain in property per annum over the last 20 years has been 6%. Recently there have been double digit increases, but remember prices can go down as well as up, so it is always wise to be conservative in your estimates. However, if you have bought the right properties in the right areas then these figures should look much more encouraging. But for the purposes of this exercise let us assume the value of each property has gone up by 20% over the three years.

Flashback

Now if you go back in time to when you bought your first property, you put up a deposit of £30,000. This is the only money you have invested in the portfolio. Everything else has been raised on the value of the properties, with the interest being paid by the tenants of those properties. This represents a profit figure of £145,000 or 482% over the period.

Rewards

It's a great way to make money. It required some input but it has not been full time, allowing you to continue you normal paid occupation. You will have to study the market, make value judgments and take the risk but the rewards are plainly there to be taken.

The conservative approach

If you had not been so entrepreneurial but had stuck with the initial investment of the first property - then the portfolio would look like this:

On your initial investment of £30,000 you have made 330%. Not bad, but by purchasing two more properties at no extra cost to yourself , your profit would have leapt up from £100,000 to £145,000.

Spreading the risk

By buying more property you have made an extra £45,000. All the properties have increased in value so you can re-mortgage them and raise more investment cash to increase your portfolio and profit potential. By 'gearing-up', you are also spreading the risk over more properties. Void periods and any maintenance charges will be spread out and the additional income will ease the pain.

Further expanding your portfolio

As your portfolio has increased in value, you decide to continue investing and buy another 3 properties at £200,000 each, making a total of £600,000.

Say another 3 years have passed and values have increased by another 20%.

Example

So eight years after making an initial investment of £30,000, you have become a property millionaire, as you own 1,4 million pounds of property, of which your share in that value is £505,000.

Managing the Portfolio

These figures are only examples but they do represent the formula for making money out of property investment. The interesting thing about this business is how quickly investors get the hang of it and how soon they overcome their initial fears of dealing with figures that look so large. On average, the number of properties owned by 'serious buy-to-let investors' is 11. It's not hard to see why. An individual - or better still, a couple - can manage 11 properties between them whilst keeping the day job - and the multiples work well at this level.