How to build a rental home EMPIRE

Why stop at one property? Invest wisely and you’ll be surprised at what’s possible

VANESSA WARWICK and Nick Tadd desperately needed a new way of life. The married couple had grown tired of their day jobs and, as they hit their 40s, wanted more independence. They decided that becoming landlords would give them the lifestyle they dreamed of and the chance to travel more.

This is not an uncommon motivation for those starting out in buy to let.

Having seen the value of their London home soar, they released £100,000 equity from it and bought a small flat in the north of the capital. Vanessa, who had a full-time job at TV channel MTV, was terrified. Friends and family feared privately that the couple would lose everything.

Vanessa recalls: ‘At the time, prices in London had been flat for years. I decided that meant there was some room for growth. I was scared stiff. but we decided we had to commit. We wanted to find a way of earning a living that would be flexible enough to allow us to be independent and to pursue interests.

‘We knew there was risk attached, but we decided that we would be ready to deal with the consequences. We wanted to hold our destiny in our own hands.’

More than a decade later, 52-yearold Vanessa and Nick, 47, who now live in Guildford, Surrey, own 20 flats and houses across London and the South. They have accumulated this small empire in the way that many landlords do: by cashing in on the price rise of one house, and using the capital to buy another.

It’s a type of gambling — but with calculated risks.

As their portfolio expanded, they became more confident and branched out from London, where service charges on flats were costing them up to £20,000 a year.

They focused on family homes in Dorset and High Wycombe, and flats in Basingstoke. They looked for properties close to good schools and with excellent t r ansport links that would be attractive to tenants.

And they bought new- build homes because they complied with building regulations and tended to have fewer problems.

The couple’s portfolio is now worth more than £5 million — but Vanessa , who runs Propertytribes.com, a website f or l andlords, says this f i gure doesn’t mean anything to them.

‘You could have a property empire worth £200 million, but if you have huge mortgages on all those houses, you don’t own anything. Instead, you should look at how much the investments are bringing in.

‘We have made a lot of mistakes along the way. It really has been a rollercoaster ride.

‘There are places we have bought that haven’t performed well because we didn’t properly research the area and tenant demand. It was all the usual things that landlords experience, but we have learned from those errors.’

Britain’s booming buy- to - let market means there are opportunities for homeowners to follow in Nick and Vanessa’s footsteps.

There are now 4.4 million households renting from a private landlord — more than double the number at the turn of the century.

And l ending to landlords is soaring. Last year, almost 200,000 landlords took out mortgages — an i ncrease of 23 per cent on the previous 12 months. They borrowed £27.4 billion, which is a third more than in 2013.

Many landlords snap up a first property with dreams of building an empire that will give them a good income. But for most people this stays just that: a dream.

Many find themselves struggling to take the next step. Around 78 per cent of all private landlords own just one rented property, 17 per cent own two to four, and only 3 per cent own more than five — yet they hold one-fifth of all rental homes.

There is a risk to stretching out your empire because i t usually means adding and increasing debt, and borrowing against y our existing properties to take on these new loans.

This has a name in investment terms — it’s called leveraging. Quite s i mply, i t means t hat when prices are soaring your profits multiply, but when they fall your losses multiply.

It works like this. You own a buy-to-let and over a few years it rises steadily in value, giving you extra equity in that property. This allows you to remortgage, releasing cash from the home and using this as a deposit for a new property.

So, say you buy your first buy-tol et for £ 200,000 with a £ 50,000 deposit and a buy-to-let-mortgage of £150,000.

In a rising property market, the property climbs in value to £250,000. Now you can use this increase as the deposit for your second property.

You should have built up some savings f rom the rent you’ve received, and could maybe add another £30,000 or so to your deposit to buy the next home. The i dea i s that, over a number of years, you will be able to take rental i ncome f r om t he properties and benefit from a rise in the capital values as well. Of course, this all depends on one key f actor — ri s i ng house prices. This way of nurturing your property portfolio has been behind the rapid growth in popularity of buy-to-let.

Brian Nixon, 60, has been a selfemployed builder since he was 16. But ten years ago he bought his first buy- to- l et property i n the hope that it would one day become his pension.

Today, he has 12 properties and is still planning to expand. He is able to continually grow his rental portfolio by remortgaging and remortgaging again.

Brian, from Lenham, Kent, says: ‘This is my pension. Like most self-employed builders, I don’t have a company pension to pay into, so I do this.

‘Even if I sell just one a year when I retire, or live off the money I make in rent, I’ll be sorted.’

All the homes Brian owns are two to t hree - bedroom houses in Orpington, Kent, which he lets out predominantly to families. None is worth more than £250,000.

He finds the properties by trawling the internet and by making allies of local estate agents, who alert him when new homes are coming onto the market.

Brian prefers to buy houses that are empty, as it makes life easier for him, but he also has to be a bit ruthless. He says: ‘Kids looking to sell a house belonging to their parents who have died are likely to take £10,000 or so less to get a quick sale.

‘There is money to be made in this industry, but it’s all about getting the right price at the beginning. Never pay too much for a property.’

Already, all Brian’s properties have gone up appreciably in value. The house he bought three years ago for £170,000 has recently been revalued at £275,000.

He puts down between 25 pc and 35 pc of the property value as a deposit, then takes out an interestonly mortgage to cover the rest of the cost.

Then he spends £10,000 to £15,000

doing up the property. Most of the work he does himself, but he also calls in favours from contacts to help with the rest.

He doesn’t use a letting agent and finds his tenants through word of mouth. He currently has eight on a waiting list to rent his properties.

He says: ‘I think if you’re fair to people they’ll be fair back, and I’m lucky with the tenants I’ve got now. I charge good rents and they look after the places.

‘But I’ve no problem knocking on a door in the middle of the night if I ever need to.’

Part of the reason for Brian’s success is that he has kept to one of the golden rules of buy-to-let investing: stick to what you know.

When the rental incomes start flowing in, you may be tempted to upgrade. For most people, this means swapping from investing in small flats to mostly two and threebed houses. But it can pay to become a specialist, whether that’s in a certain type of property, in a specific area or in a particular group of potential tenants, such as students.

If your business model works, just keep repeating it.

Also think about how you’ll cope with more properties, given the inevitable rise in the number of complaints, extra bills for maintenance and admin galore.

Alice Carroll, 63, and her partner, Clive, own 21 properties across Bournemouth and have built their portfolio by specialising. She is one of the most popular student landlords in the town.

After moving to the seaside resort in 1997, three years later Alice decided to leave her career to focus on becoming a landlady.

The former stockbroker owned a large house and had put up international students for a few years, so she knew there was a demand for student housing. She took out some equity from her house and bought her first buy-to-let property. Within six months, the property had soared in value, so she drew down 15 per cent of the value and bought another.

It snowballed from there. In the property market crash of the financial crisis in 2007, she bought seven more.

That was her most nail-biting moment, as she feared she might end up in negative equity, with a load of homes worth less than the money she had borrowed.

Alice says: ‘When times are hard, you need to ride the storm. The price of a property moves up and down, but at least you still always have a building.’

She has learned many lessons. First-year students are the ones who tend to do the most damage, so she tries to rent to second and third years because they have lived away from home before and know how to run a house.

Students also book in advance and have guarantors — normally a parent — who will pay the rent if things go wrong. They involve more work, though, largely because they expect rooms to be furnished.

Alice says: ‘As long as you do regular checks, you should be fine. You take a chance. Because students book in advance, I’ve got groups securing their housing for next September — and that’s great because it means you know where your money is coming from and it minimises your void periods.

‘Also, students have guarantors. They are higher maintenance because t he properties are furnished, so you have to keep that maintained. But another benefit is that you need only one communal room, so you can turn other downstairs reception rooms into extra bedrooms — and that boosts your rental yield.

‘ I work hard, and the early summer when everyone is moving out, and September when everyone is moving in, are very busy times. But you get busy periods with any business, and we just get everyone we can on board to help with all the cleaning and the admin, and we get it done.’

So can you rely on bricks and mortar for your retirement? We’ll look at this in detail later this week. But while it is possible, working as a landlord is just that: work. And many people don’t want that in retirement.

There are a number of things you need to bear in mind about buying property as a pension. If you are relying on it as an income, then you need to remember that there is no absolute guarantee of getting one with property. Your flat could remain unlet for a long period, or you may be faced with a huge bill and that will eat into your income.

What most people want in retirement is a secure income, and you can only receive that f rom a pension annuity or a final- salary scheme. However, as a way of supplementing this income, it could prove a boost.

An alternative is to build up a portfolio of homes and sell them when you need money.

There are two considerations here. First, you are exposed to the foibles of the housing market. If you suddenly need cash at the time there is a housing market crash, then you’ll end up getting far less than you had hoped for.

Second, you may not be able to sell in a hurry, leaving you stretched for cash and paying a mortgage while the property is for sale. You also need to remember that the mortgage will need paying off.

However, with new pension freedoms around the corner, it could well be that millions more retirees look to property — an asset that has done extremely well for them over the years — to boost their retirement funds.