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Expanding your portfolio - a landlord's guide

POSTED: 19th September 2014
IN: Landlord helpful guides
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Growth in the private rental market could have many landlords thinking about expanding their property portfolio.

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Buy-to-let property investors have seen some encouraging trends of late, most notably rising house prices and strong demand on the private rental market.

With these trends likely to continue in the near future, many landlords will be considering the option of expanding their property portfolio.

Before going ahead with this option, you should ask yourself some key questions.

Is now a good time to expand my portfolio?

In terms of tenant demand in the private rental market, it certainly seems that now is a good time for landlords to take on more properties.

With a large proportion of consumers still struggling with a lack of disposable income and home deposits prohibitively high for most would-be first-time buyers, renting is the preferred option for many.

While renting is traditionally seen as a short-term arrangement while tenants save up for a mortgage deposit, research has indicated that this may be changing.

A survey by market research firm BDRC Continental and Allsopp estate agents found that 39 per cent of tenants were committed to renting, with only a quarter planning to buy a home.

The vast majority (91 per cent) of people participating in the study saw their rented property as their home, rather than a temporary roof over their heads.

Almost all of the landlords surveyed towards the end of last year were committed to the lettings market for the long term. More than two-thirds (68 per cent) of respondents rated their business expectations for the near future as either good or very good.

Alongside tenant demand, another key factor for buy-to-let investors to take into account when planning a portfolio expansion is house prices. The market has seen strong growth for the past year or so, but there have been suggestions that this could ease as we approach the end of 2014 and enter 2015.

The National Institute of Economic and Social Research have predicted that prices will rise by 7.8 per cent this year and 4.2 per cent next year, while Hamptons International forecast annual growth of 8.5 per cent and 5.5 per cent.

Can I release equity to fund expansion?

If you have benefited from growth in the value of your existing properties in recent times, remortgaging to release equity to fund your next investment is certainly a viable option.

With the right timing, remortgaging can deliver significant financial benefits. As well as allowing you to release some of the equity tied up in your property, it could secure you a lower interest rate and reduced monthly repayments.

It could be the right time to remortgage if your current deal is coming to an end, but bear in mind that your lender is likely to charge an early repayment fee.

Using this method to provide funding to expand your portfolio is preferable to taking out a loan, partly because having other outstanding debts will reduce your chances of being accepted for a buy-to-let mortgage on a new property.

In a recent report, Moneyfacts.co.uk pointed out that the range of mortgages available in the buy-to-let sector is on the rise, but experienced landlords are benefiting from greater choice and a better chance of securing a loan than first-time borrowers.

Sylvia Waycot, editor of the website, said: "Because first-time landlords don't have a proven track record for running a buy-to-let business, they do pose a greater risk to the lender.

"Appetite for this risk is still lacking, which is borne out by the rise in the numbers of attractive loan-to-value deals that are restricted to borrowers with a previous buy-to-let history."

How should I plan and execute my expansion?

The process of planning your expansion should include consideration of some important questions. For instance, what sort of property do you want to invest in, and in what area?

If you have already enjoyed success in one particular niche - letting out a family-sized home in a suburban area near schools and play areas, for example - you might want to stick with what you know.

On the other hand, you might be interested in diversifying, possibly going for a smaller, cheaper property in a town on the outskirts of a big city, which will appeal to young couples commuting to work.

Properties in or just outside university towns are often good investments, owing to the steady flow of demand from the student market.

The owner of the Sheffield branch of lettings agency Belvoir, Rich Flay, recently advised that quality and location should be bigger considerations for buy-to-let investors than size.

He added: "Before investing there are numerous things you need to research, including - but not limited to - cash amounts, mortgages and rates, fixed costs (such as service charges in flats), potential repairs and improvements, furnishings, gross and net yields, plus likely returns on capital employed."

Chris Radford, owner of Belvoir Brighton and Hove, said location is "vitally important", but also stressed that the condition of the property must be considered.

"Tenants want dry, structurally sound properties in good condition (cracked fittings, marked walls, damaged appliances, grubby kitchens and bathrooms are all a turn off)," he commented.

Another question to ask yourself is whether you want to manage the property and liaise with the tenants personally, or go through a lettings agency.

Using an agency is an additional expense, but managing tenancies yourself can be time consuming and potentially stressful if you have more than one property.

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