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Nine steps to building a property portfolio

Current interest rates make borrowing significantly less expensive than it has been for some time.

So, if you're looking for a profitable home for your money, now might be the time to consider property as part of a balanced investment portfolio.

Buying-to-let or investing in property abroad could both be attractive options, but there are a number of things you might want to consider before adding property to your portfolio.

1. Set your goals

What do you hope to achieve with your investment property? Is your ambition to generate a lump sum for the future – such as a retirement pot, for example? Or to provide an immediate income? In both cases, you need to work out how much you can afford, as well as how much you are going to need to invest – by no means a simple task. If you are investing in the property market then it makes sense to get investment property advice.

2. Know yourself

Do you wish to add a single property to your existing assets, or would you be looking to invest in multiple properties? Do you see yourself buying investment properties, doing them up and selling them on? Or would you rather purchase buy-to-let or commercial properties and then step back and leave them in the hands of a management company? You need to think extremely carefully about what ratio of borrowing to equity you're comfortable with and stress test your plans against any potential interest rate rises or vacant tenancy periods.

3. Start small

Once you’re clear about your goals, it’s time to buy. Some investors may prefer to start with a single property in an area they already know. That could be their home town, of course, but many people look for a buy-to-let opportunity in the towns where their children are at university, or a second home in an area they themselves enjoy.

You could use your first property investment as a learning experience to develop contacts with estate agents, surveyors, tradespeople etc. and establish exactly how much time and effort is involved. Since you’re unlikely to generate a significant return on your investment from a single property, this information will be useful should you decide to expand your property portfolio.

4. Do your research

Which locations and types of property offer the highest number (and best choice) of tenants, and the highest yields? Which are the up-and-coming areas rather than the locations already commanding a premium? And do you know the language of landlords; what the difference is, for example, between freehold and leasehold properties?

If you're looking at properties abroad, get local specialist advice on locations and the latest legislation. Prices can fall as well as rise but doing your research will help you determine which areas are most likely to deliver the best returns.

5. Do the maths

Any property added to a balanced portfolio should aim to generate a profit once mortgage repayments, letting agent fees, insurance, service charges, maintenance costs and property tax have been taken into account. You will also need to allow for income tax on rental income after deductions for maintenance, and Capital Gains Tax should you decide to sell.

6. Leave your heart at home

If you're serious about adding a property to your investment portfolio, treat it as a business and don’t be swayed by personal tastes. Having said that, be imaginative – if you can spot the potential in a property that others miss, you're more likely to secure a bargain.

7. Retain a cash cushion

No matter how well you’ve planned and budgeted, owning property can bring unexpected costs. There may be repairs to pay for, for example, or you may have a period without a tenant. The property market can be subject to peaks and troughs so retain a buffer of cash and you’ll have something to tide you over should things not go your way.

8. Expand your portfolio

In a rising property market, subject to lending application and approval, you can have your properties revalued and borrow against the increased equity. This is known as ‘gearing up’ and is a tried and tested approach to expanding a property portfolio. As well as ideally providing you with more income, having multiple properties on your portfolio spreads the risk should one property fail to secure a tenant for a period or prices fall.

9. Don’t do it alone

Building a property portfolio is not for the faint-hearted: as the portfolio grows so too do the management challenges. Bricks and mortar don’t come cheap so it’s worth getting professional advice from the outset. How effectively and efficiently you structure your finances from day one could ultimately determine the success of your portfolio.

As with all investments there are no guarantees even for those looking to extend their portfolio, perhaps to include property.

Important Information

Any views expressed by Lloyds Bank Private Banking are our current in-house views as at January 2015 and should not be relied upon as fact and could be proved wrong.  Views expressed are not intended to provide legal, tax or financial advice.

Past performance is not a reliable indicator of future performance. The value of investments and the income from them can go down as well as up and cannot be guaranteed. Investors may not get back the amount they originally invest.

Lending is subject to an assessment of your circumstances. Specific eligibility criteria and conditions apply for certain types of lending. Lending is subject to status and application. Security may be required.

Tax treatment depends on individual circumstances and may be subject to change in the future.

Your home may be repossessed if you do not keep up repayments on your mortgage.

For access to advice from a Private Banking and Advice Manager, you’ll need at least £250,000 in savings, investments and/or personal pensions and/or a sole annual income of at least £250,000.
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