The benefits of building a property portfolio
Property investment delivers returns in two ways: rental profits can provide ongoing income and then you should get capital gains over time through the asset growing in value
The basis of a successful buy to let business is positive cashflow.
That means each property generates sufficient rental income to cover all the associated costs – e.g. mortgage payments, maintenance and insurance – and also delivers an income for you (less tax).
But borrowing via a mortgage allows you to put in a relatively small percentage of the property’s purchase price yourself, with the bank putting in the rest.
For example:
You’re buying a property for £240,000
All cash purchase:
Your capital input: £240,000
10% growth: £24,000
While the profit from one property might be modest, when you start to multiply that as you buy more properties, it can quickly become a significant figure. And if you are able to negotiate better prices for your products, services and labour as your ‘buying power’ grows, that reduces the average expenditure per property, increasing your profits further.
One of the big benefits of investing in property is it’s the only asset class where you can leverage the bank’s money and profit from it.
Return on investment: (£24,000 ÷ £240,000) x 100 = 10%
Buying with a 75% mortgage:
Your capital input: £60,000
Return on investment: (£24,000 ÷ £60,000) x 100 = 40%
So, the benefit of building a property portfolio, rather than investing in another type of financial asset is that you can make your money stretch further and generate a much better return.
When the property increases in value, even though you only own a percentage of it, you get to keep all of the equity growth (minus any tax you need to pay on your profits, of course).
But beware - although you can make money from property, you can also lose money.
Rents and property prices don’t always rise in line with inflation, so although they can rise, they typically need to do so by three per cent each year.
In the recent cost of living crisis, mortgage costs rose rapidly, causing the property market to stall and causing some landlords’ properties to become loss making.
And, if the property market crashes, just as prices and rents can rise, they can fall and when they do so, it can happen within a matter of months.
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