Building a Buy To Let Portfolio
The continued increase in house prices coupled with a strong rental demand has made buy to let an appealing area for investment. The big mortgage lenders have even created specialised companies to deal with the explosion of interest in the buy to let market. Their lending requirements are now more liberal – allowing self-certification buy to let mortgages and generous loan-to-value (LTV) ratios.
If you're serious about property investing, it may make sense to start building a portfolio of buy to let properties. One of the basic advantages of having a diverse portfolio is that you tend to balance out your rental incomes: when rents in one area are flat, rents in other areas may be going up. You also become more cost-effective through economies of scale and leveraging trade contacts.
Perhaps you already have one property and you're looking to purchase another. You'll still need to put up some capital as you did in your first buy to let mortgage, but not as much as you might think. By this time, your first property will already have appreciated in value, creating equity that can be used to develop your portfolio.
You can cash in on rising property prices by remortgaging the property to release the equity that is available in it. With the cash that you generate, you can pay for the deposit on your next acquisition. You can repeat this process every time you have accumulated enough equity in one property to fund the deposit on the next. With LTV ratios ranging between 75% and 85%, your deposit requirements will range from 15% to 25% of the purchase price.
What you're looking for in the properties that you’d want to buy are at least two things: low-priced properties with good prospects for capital growth and high tenant demand which makes for higher than average rental yields. Rental is particularly important since the lender will be most interested in the rental potential of the property. You should consider reliability of rental and minimised void periods, because mortgage payments will come from your pocket during void periods on your property.
If you are self employed, you will probably require a self-certification buy to let mortgage which will be based on the rental income of the target acquisition. Traditionally, that rental should be 130% of the annual interest payments, but the more intense competition has resulted in more favourable ratios. Currently, you'll find lenders that accept a 100% ratio of rentals to annual interest.
If you already have a number of properties, you will find mortgage brokers who specialise in servicing the needs of landlords with multiple buy-to-let properties. Lenders usually have a maximum total amount they can lend to an individual borrower, as well as a maximum limit on what can be borrowed against a single property.
One advantage in using mortgage brokers is that they may be able to arrange a borrowing limit across your properties. For instance, all your properties may have a certain overall value and you are able to set a loan facility of say 80% on it; if you have only borrowed up to 70% so far, you still have a reserve. You can have quick access to cash, which is convenient if you bid on auctions to exploit a particularly good opportunity.
As your portfolio develops, you probably will opt for interest-only mortgages instead of repayment mortgages. This is sensible, since it will keep your monthly repayments low and help maximise loan amounts. You'll also have to decide whether to get a fixed or variable-rate loan. This is a decision that depends on your circumstances and investment goals, but there are borrowers who will prefer a mix, that is, have some of their mortgages on fixed rate and the others on a variable rate. This balances out the risk of interest rate movements on their overall portfolio. While variable-rate mortgages usually imply lower monthly payments, they pose increased risks to you if interest rates are on an upward trend.
Using equity in existing properties is a good way of funding additional property purchases, however you have to be aware of the impact that falling property prices can exert. Negative equity could result from over extending on mortgages and could place an investor at risk in a falling market.
This article is for information only - you should seek professional advice before making any investment decisions about buy to let properties.