Personal Finance: How to build a letting portfolio

A buy-to-let portfolio is a valuable asset that can earn you a good and rising income, so treat it as you would any other business. Picture: Getty

Let your head rule your heart when it comes to making decisions, from whether or not to buy a specific property in the first place and how much to spend on renovations to whether or not to accept an application from tenants. Be professional. Comply with the law and declare the income you receive, less allowable expenses, on your annual tax return.

TARGET YOUR MARKET

Consider which type of tenant a property will attract. High-quality, professional tenants usually want one or two-bedroom flats in good, city centre locations. A two-bed flat in a decent part of Edinburgh bought for, say, £150,000 could command a monthly rent of around £750, giving a healthy 6 per cent yield.Alternatively, you could consider investing in an area popular with families or students. While families tend to look for three or four-bed houses in prime commuter belt areas, students want cheap and cheerful properties near university campuses.

SELECT TENANTS CAREFULLY

No landlord wants tenants who default on their rent or cause damage to a property – they cost time and money. Make sure you reference prospective tenants and, if necessary, ask them to secure a guarantor. Look for a managing agent that offers monitoring of tenants’ credit worthiness throughout a tenancy and free tenant eviction should things turn sour.

GET THE BEST FOR YOUR CAPITAL

Don’t buy one property with £150,000 – buy three by putting down £50,000 deposit on each and borrowing the rest of the funds. This will spread your risk and give you greater scope for capital growth. Also shop around for the best buy-to-let mortgage deal. Birmingham Midshires is currently offering a two-year tracker with a starting rate of 2.24 per cent, provided you have a 40 per cent deposit, while Loughborough Building Society has a three-year discounted variable rate deal at 3.25 per cent for those with deposits of 25 per cent or more. It’s prudent to put aside 10 per cent of the rent each month for maintenance.

RESEARCH THE MARKET

Check out capital values and average rental valuations in the area. A good letting agent with local experience will be able to give advice on which areas and properties are most in demand at the current time. They should also know which new developments are springing up in the area and the typical rental yield that these properties would command.

• William Lobban is a director of lettings specialist Martin & Co in Edinburgh