Growing your buy-to-let portfolio is always an alluring prospect. The dream of owning a whole set of valuable property assets and drawing rental income from every single one at once sounds amazing – on paper.
But do more properties equal more profits in the long run? Here are three things to keep in mind before jumping straight in with a brand new property purchase.
Define your property investment goals
Why have you gotten into property investment? Perhaps you’re looking to achieve financial freedom, or build a nest egg for your retirement and your children. Maybe you’re looking to leave your day job behind and make property investment your full-time career.
How much will you need to make from property investment to make those dreams a reality? How long will it take you to make that much money? What sorts of rental yields will you need from your portfolio to achieve your aims?
Be specific with your goals and set realistic timeframes. Remember, buy-to-lets are a long-term investment; rental income is a good revenue stream in the meantime, but it could be several decades before your property’s value has grown enough to sell for a decent return.
With these questions answered, you can then assess whether adding another property to your portfolio will really help you achieve those goals. Does the rental yield actually meet your needs?
And as we’ll cover shortly, will the extra income outweigh the added costs and risks?
Portfolio landlord restrictions
Are you already a ‘portfolio landlord’? If you are, you might find it a lot trickier to secure a mortgage on a new investment property.
Portfolio landlords are defined as those with four or more buy-to-let properties with outstanding mortgages.
Borrowers with more pre-existing mortgage debt generally represent higher financial risk for lenders; which is why portfolio landlords often face higher scrutiny when applying for a new mortgage.
In practice, this usually means filling out more paperwork about your property investment business, and potentially being declined by lenders more frequently; so adding a new property to your portfolio could take much longer than your previous buy-to-let purchases.
It’s not impossible to secure a new mortgage deal as a portfolio landlord, but it’s something to keep in mind when weighing up your options.
And mortgage debt brings us neatly onto our next point…
Can you afford another property?
Buying up another property may provide another stream of income alongside your existing buy-to-let property (or properties) – but it can also mean higher costs:
- Unless you’re paying in cash, any new buy-to-let purchase will need financing; which means another mortgage bill each month.
- If you’re at the higher end of your income tax bracket, the extra income from a new buy-to-let investment could push you into the next bracket; leaving you with a larger tax bill.
- Don’t underestimate the hidden costs of property investment; such as letting agent fees, stamp duty and repair bills. These can quickly add up and eat into the profit potential of a shiny new buy-to-let.
Will the rental income from the new property cover these costs and more?
Don’t forget to factor in rental cover requirements. Mortgage lenders will want to see that your monthly rental yield can cover 145% of your monthly mortgage payments (assuming an interest rate of 5.5%).
Again, these costs aren’t necessarily a dealbreaker. You may find that the added revenue from a new property more than outweighs the costs.
Plus, diversifying your property portfolio (by purchasing in a different location, adopting a different investment strategy, or selecting a different property type such as an HMO or commercial property) can also help you mitigate the financial risks that a single standalone property or a smaller homogeneous portfolio might endure.
To help you decide whether you can afford another property, we’d recommend setting up a complete budgeting plan which encompasses:
- your current property investment income and costs
- realistic projections for your existing portfolio’s capital appreciation
- the potential revenue, costs and capital growth of the new property
- how much you’ll likely be able to borrow from mortgage lenders
- your own personal outgoings and income outside of property investment
Don’t forget to include an emergency fund within your budgeting plan. Whether it’s unexpected repairs, tenants moving out early, or just the unpredictability of the property market, plenty of situations can pull out the rug from under your feet.
Conclusion: don’t rush into it
We hope this article hasn’t scared you off too much from investing in another property! Growing your portfolio can certainly provide benefits, as long as you approach it strategically and with sound judgment.
It’s good to keep a close eye on the market and to buy at the right time, but don’t push yourself into a purchase you might later regret. Weigh each new investment opportunity against your goals and your financial situation first; and if it meets your requirements, go for it!
GNS Associates offers expert buy-to-let tax advice and tailored accounting services to help property investors drive their business forward. Or if you are looking for other services like let property campaign declaration, feel free to get in touch. Arrange a consultation today – call us on 0208 090 2604 or email us at email@example.com.