Key considerations when buying a residential property portfolio
Buying a residential property portfolio, can be a great way to diversify your investments, generating both income and capital growth over the long term.
Purchasing a portfolio of properties can also reduce income risk and purchase taxes.
Here is our guide to buying a portfolio of properties, outlining some key considerations.
View in person or get a local agent to view on your behalf.
Many property portfolios are sold off-market via sourcing agents and brokers, due to their complex nature. Baring in mind these 3rd party intermediaries get paid upon the completion of a successful sale, our first rule, is to view the properties in person and if that is not possible, engage a local agent on your behalf. Only then can you get a true idea for the properties, the common areas and the location. Internal photos of a property and a floor plan will not tell you if the common entry system is broken, or not in place at all. It will not tell you if the rear drying greens are dumping grounds for everything and anything from old bikes to old mattresses and sofas. Local agents will also be able to give you valuable knowledge of the location and the general demographic.
More significantly it will allow you to better understand what you are buying, the potential to make the portfolio better performing and an understanding of the capital expenditure required to do so.
Asset management is a key consideration of our management team, in assisting landlords create the best performing properties and portfolios, who are also well versed in overseeing modernisation and renovation programmes.
Discount is based on risk.
Historically property portfolios were transacted at discounts of as much as 20%, however, more recently there was a shift more towards lesser discounts, if any at all. So what are the barometers that determine the discount?
The answer is risk. Recent rent increase and eviction bans made residential property portfolios become viewed as a riskier investment class and as such prospective buyers were looking for significant discounts.
Conversely, the landlord of a well-managed and fully compliant portfolio, that provides day 1 income, is going to see their assets as low risk and less willing to discount.
This leads us into our next consideration, auditing the portfolio.
To understand how well managed the portfolio is, a full audit is required, only then can you understand your risk exposure.
It is essential to undertake a pre purchase audit, which Gilson Gray undertake for all our investors. We would review and consider the following;
- All the leases.
- The rent ledgers.
- An understanding of any rent arrears.
- Deposits held.
- Safety certification.
Other key considerations:
The demographic of the tenants and an understanding of how rents are paid. It is pertinent to understand if any tenants’ rent payments are made via local councils or Universal Credit. Whilst both provide a great source of income for landlords there is a prescribed process required to change the payments to the new landlord or managing agent that can cause disruption to the payments and subsequently a short-term cash flow consideration. Gilson Gray work tirelessly to assist landlords and tenants with the transfer of these payments to the new landlord or agent, however, our experience is that there can be short term disruption as a result of the change of ownership.
Lastly, reviewing the landlord register to understand how many properties within the block have registered landlords or are owner occupied, can provide a great insight and understanding of how easy it will be to deal with a common repair, if and when they arise.
All too often these are overlooked and given the increasing number of storms and the damage they have caused in the recent months, spending a small sum on roof reports may prove to be the best investment you make in the transaction.
Retentions for roofs, boilers and rent arrears
Aligning the seller’s expectation on price with what the buyer is prepared to pay, is often the main stumbling block in portfolio transactions.
One solution that we promote at Gilson Gray, is that of post purchase retentions. This mechanism provides comfort for the purchaser and a direct means to claw back monies should there be issues with roofs, boilers or rent arrears. Agreeing a retention for a period of 3 months, can be a great way to get a portfolio purchase agreed and over the line.
Gilson Gray are currently selling property portfolios off-market. If you are looking to invest in residential property our dedicated and award winning team are on hand to help and advise you.