Let’s start with a definition:
A property portfolio is two or more investment properties.
If you have just one, it’s unlikely to be making you a living, and it’s unlikely to be taking up much of your time. If you have two, or three, or four, then you already have a small portfolio, and that is likely to be more of a commitment.
Building a property portfolio – either from scratch, or from where you’re at now, whether that be a single buy-to-let property or a handful of investments is the ambition we are concerned with here.
To what extent you build a portfolio is really limited only by your own time, energy and resources. Five properties might be your goal, or you might be looking for a £5 million portfolio, the basic techniques are the same.
So now we have a definition, and we know broadly what we’re setting out to do, let’s move on to a basic, fundamental question.
What Do You Want?
Building a property portfolio is a serious business, and you need to be very clear as to what it is you want from it, before you start.
So, ask yourself the question – what do you want to achieve? What is the primary reason for you to build a property portfolio? In short – why bother?
Now the standard answer to this goes along the lines of:
“I want to own ten properties.”
Or…
“I want my own business.”
Neither of which get to the heart of the matter.
You need to ask yourself again – why? Why do you want to own ten properties? Why do you want your own business? Is it a status thing? Is it an independence thing? What?
Surely, the reality that underlies the question comes down to one thing – money.
There is absolutely no point in owning ten properties unless they are making you money (unless you are in the realms of the super-rich and, for current purposes, we’re going to assume you’re not!)
There’s absolutely no point in having your own business unless it provides you with an income.
Yes, the answer may be refined into ‘achieving financial independence’ or ‘providing for a comfortable retirement’ or even ‘generating a second income’, but the underlying answer as to why you would build a property portfolio is to make money.
But maybe there’s even more to this; yet another layer beneath the simple concept of making money. Maybe it’s not just about making the money; maybe it’s about making it passively.
Key Tip: Property is about the only investment that allows you to create a passive income for yourself – for LIFE!! Freedom!
Everyone will have different goals but, for us, all goals resolve down to one ‘meta-goal’ – Freedom. What you do with that freedom is a matter of personal choice, but the freedom is what’s important.
Freedom from what?
Freedom, basically, from being economically strong-armed into doing things you don’t want to do!
Some people love their job and are in no rush to stop doing it. They’re the lucky ones.
For the majority, work is merely a means of ‘making a living’. Enjoying what they do is little more than a teenage pipedream.
We have one life (as far as current evidence goes!) and the one precious and non-renewable commodity that we have at our disposal is our Time.
Yet even though this one commodity is so precious and is completely non-renewable, isn’t it extraordinary how little most of us are willing to sell it for, out in the jobs marketplace?
By creating a secure and passive income for life, you have the option of stepping out of the world of salaried work, the world where your Life is crammed into the few hours and minutes you can carve out of an average hectic week. You can choose, if you so wish, to live on an income for which you work very little, and free up your days to do other productive stuff that you actually enjoy.
What is a Passive Income?
When you work for an employer, you have to do stuff, every working day.
You may, for example, have to arrive at the office by 9am, not leave before 5pm, and be demonstrably productive and co-operative in between. Or you may be working shifts at a factory where your value is directly linked to how active you are during the time you’re there.
In return for that labour, that time, that physical or mental input, you are paid an income. And the trap, of course, is that you get so busy maintaining that job, which in turn maintains the lifestyle you develop around it, that you have little time to relax with your family, let alone developing alternative income sources.
There is also a direct relationship between the hours you put in and the money you get out.
Passive income is different. As the name suggests, a passive income breaks the real-time link between the effort and hours you put in and the money you receive. And it offers you more of a choice as to what you do with more of your time.
Of course, passive does not equal effortless! There IS effort involved – a lot of effort, in fact – but it’s considered, concentrated, up-front effort on your own behalf, and not on the behalf of an employer you may never meet. As a model, passive income holds the promise that, at some point in the future, the effort will shrink to a minimum, while the income will continue undiminished.
A property portfolio can deliver on such a promise. Sure, there’s effort in buying the properties in the first place, setting them up, tenanting them, managing them and so on.
At some point, though, it will reach a stage where the riskiest first few years are behind you, the management is being handled by people you trust, and there’s a healthy income stream flowing from your property investments without very much input from you at all. That’s the passive income promise delivered.
Try getting such a promise out of your employer and see what happens!
Earn £30,000 Per Year – Without Lifting a Finger! (or £60,000 or £100,000 or more)
This is the passive income reality that is possible for anyone reading this book. And the £30,000 figure is just for the sake of running a couple of illustrative examples; don’t see it as a limitation!
So, starting with a required passive income of £30,000 per year and working backwards, how can this be achieved?
Well, purely in terms of rental income, if you assume a rental yield of 8%, and a finance cost of 5%, then this leaves you with 3% to play with. Assume a further 1% goes on rental agent costs, and another 1% on maintenance etc., then you’re down to 1% for your pocket.
If 1% = £30,000 (our required income) then, in order to generate this purely from rental profits, then you’ll need a property portfolio of 30,000 x 100 = £3,000,000!
Now, don’t worry! There is another way of taking profits other than from the rental income, and that is from capital growth. But as a first step, you can see how the numbers add up.
If we now run a modest capital growth scenario, ignore rental income (and assume that rents cover all costs and no more) then the required portfolio gets a little more modest.
Use a Conservative 5% Capital Growth
Since 5% must be equal to your earning requirement of £30,000, then this profit has to come off a total portfolio of £30,000 x 20 (because 100 / 5 = 20) = £600,000.
And that only means four properties of £150,000 each.
Key Tip: You’ll see that we’ve assumed 5% growth time and again. We like it because it’s conservative.
Over the past fifty years, property has doubled in value every seven years, which is a growth of over 10% p.a. but we prefer to halve that and, if our calculations work out at that level, anything over is a bonus!
Can you see how quickly you can define your portfolio, once you’ve identified your goals and earning requirements?
Of course, your goal may well be something much broader and more complex than ‘financial independence’. Don’t let that put you off!
Key Tip: Say you wanted to earn £60,000 per year without lifting a finger. Can you work out how?
Easy, you just need twice as much property growing at the same conservative rate of 5% per year.
So, a portfolio of £1,200,000 (5% * £1,200,00 = £60,000)
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Daniel Peacock