How to build your own buy-to-let portfolio.

It is quite interesting to see how some investors put their funds into stocks and shares in a chosen stock market in London, Frankfurt, New York or Tokyo, normally using their own funds and expecting to make money over a period of ten years. A good stockbroker will explain to his client that the best approach is to just invest the money, or use it whilst it is invested and give it the right amount of time to yield income and increase in value. Property is no different.

First Golden Rule: Capital.

Like in most businesses, cash is king. My first piece of advice to a would-be buy-to-let investor, no matter how realistic and painful it may sound, is that you do need cash in the bank to start off your portfolio of properties. Less cash, less properties; more cash, more properties. It is that simple. Yes, there are some cases in which bank finance or other forms of borrowing can achieve successful goals, but not often in a start-up. If the project does not fly outright from the start it could put you – even on a personal level – in an extremely delicate position, and I do know that from my own personal experiences. Not to be recommended. We are talking about cash flow problems, personal liability and a long etcetera that should be avoided. I repeat the same phrase to all my new clients: “Paying off your debt is a powerful wealth-building tool.” The minute you become debt-free, you are building wealth for yourself whilst decreasing stress and improving state of mind. This gives you a tremendous advantage over those that have to be fighting to pay off their capital debts. Naturally, this works where possible. I am not saying some form of bank exposure is bad. Au contraire, it could in some cases help you to expand your portfolio, but you should try and avoid it in the early stages. Ideally you should work with your own funds. I have known many highly successful investors who sold a family business or a large farm or property. They all had something in common, and that was wise investments in the right markets using personal capital. The larger the amount of money you have ready to use, the easier it is to invest properly.

Money talks. And this is of particular relevance when market corrections occur along a possible market recession.

Second Golden Rule: The Business Plan.

How often does an entrepreneur use a business plan? The answer is difficult but the correct answer is a business plan is essential to reach the desired goal. As much as you need a map or a GPS to motor from A to B without getting lost. Important questions come up when starting The Plan:

When will I make money?

How to fund?

Which area or jurisdiction should I invest in?

The first question is not easy to answer but as a rule always buy the best you can afford with a guaranteed or almost guaranteed income. Make sure there is proof of income given to you with the relevant contracts and even tax returns or VAT returns where applicable. Do not be soft or oversee this. Your business consultant can do this for you if you are abroad or have no time to do it. It is normal to make money within the first six years. Less, perhaps, than in the case of investing in the stock market, and much less volatile. And it is fully yours, because you own it outright. Time will also correct most mistakes in property. Not always the case in other investments.

Finally: Which Area?

Location, location, location are, and always will be, the three most important things in property. Look out for best spots, possibly an old building being renovated. Try and get a good view to the sea if possible. People will pay a premium for this. I always say that anything close to the sea is worth a lot more than anything miles from the sea. Light is of paramount importance. Darkness is a killer – it will not sell or rent quickly. Run-down areas with derelict buildings nearby where people are hanging their laundry outdoors… no good at all. But there are exceptions, such as an area like the Upper Town in Gibraltar. Some gorgeous renovated Colonial buildings have been put on the market and some interesting deals have been closed.

Gibraltar or abroad? Property resembles love. No particular location is better than another. Gibraltar is good, but so is Portugal, or Spain, or mainland UK. Look into the tax exposure with your consultant. Even Germany provides excellent investments. If you wish to have your portfolio closer, why not do Gibraltar and Spain? Make sure you avoid seasonal markets. Stick to larger cities or towns. Student accommodation is on the rise. Buy close to a University Campus. And your income is nearly guaranteed.

How much yield? You must make sure the property yields at least 5%, ideally 6% upwards. Sometimes more can be achieved. Stay away from promises of double figures yields of return promised by some unstable country. Very dangerous indeed.

Residential, Commercial, or Industrial?

50% residential, 25% commercial, 25% industrial. You can play around with figures. There are always clean deals out there in the markets to be picked up. For example, I was offered a lovely shop in the Golden Mile of Marbella, fully rented yielding 6% per annum. Why did the landlord wish to sell? Because he is wisely cleaning up his debt and wishes to pay off the mortgage and keep the balance to buy something smaller with no debt. So this really means one can pick up good deals without the usual ‘catch’.

Another good source is some quick in – quick out investor who has bought a lovely apartment in a new building in Gibraltar, or somewhere along the coast. He most likely bought off-plan and wants out with a quick return. A blessing for some investors as there is no risk buying a ready to move in property, and the price can often be attractive and give us room for future profit plus an interesting rental income. La Linea has a few buildings where apartments yield as much as 10%. Not my choice, but still money makers. Malaga seems to be extremely in. Getting a little pricy and possibly too much going on, but still very good in some areas. It really went from being a smelly old town in the 70´s to a beauty in this new century. A bit like Montpellier in France where a complete transformation took place. Marbella has some good deals as well.

No rush, and a good amount of research is most certainly the answer.