The true cost of building your own portfolio

Many people think that they can and should invest in UK residential property, and that they can easily do so alone. 

Why?

  • That’s what the media tells us – media publications and daytime television suggest that anyone and everyone can and should become a property investor
  • Friends and family are doing it – although in reality many of those people have simply bought a home, and allowed time to pass – they are reliant on lucky timing, rather than true investment capabilities
  • For many years, property was seen as an ‘easy’ way to make money, though this situation has since changed and we are in a new environment, with increased taxation and regulations.
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Investing independently is not as easy as it is sometimes made out to be. It takes time, knowledge and hard work to do it profitably and safely.

The reality is, that whilst it is possible to have a full time job and invest in property on the side, it is not necessarily advisable. Not only could you risk your health and well-being through working all hours, but you could also risk making costly mistakes if you go too quickly, or buy without having a proper strategy in place. For example:

  • You could end up buying the wrong assets
  • You may struggle to stay on top of management – even well-meaning investors can fall foul of the law, opening themselves up to substantial liabilities. As an investor, you want assets, not liabilities!

Start with the end in mind

Whether you decide to invest independently or to work with others will depend on your goals. 
  • If your goal is to build a large portfolio, then investing independently can easily become a full time job. The chances of you making expensive mistakes can be high if you don’t have a clear strategy, know what to look out for, or know who to ask for support.
  • If your goal is to create passive income from property then it is a false economy to do all the work yourself. You should not be taking on the work of building and managing the portfolio. Rather, these tasks should be outsourced to specialists. For many investors, decisions are driven by wanting to save money, or to minimise risks. They may not realise that working with the right professionals is one of the easiest ways to de-risk their investment and add value. 

So what does building your own portfolio involve?

The stages involved in building a portfolio are listed below. We’ve also made some assumptions on the amount of time it would take to establish a basic portfolio.

  • Developing your strategy (minimum 50 hours), which includes:

    • Understanding your goals: what are you aiming for financially, and personally?
    • Understanding all the options available to you, for example: 
      • Knowing the difference between types of residential investment property  including HMOs, single lets, serviced accommodation, and understanding the pros and cons of each 
      • Understanding the difference between different types of asset, such as a city centre high rise block of flats or a seaside town bungalow, understanding the pros and cons of each and knowing which aligns best with your goals
    • Recognising sales ‘hype’ and deciding on the best strategy for you
      • Unfortunately, it’s not uncommon for developers and their agents to oversell schemes, marketing unrealistic returns through inflated yields and over-optimistic capital appreciation forecasts. Inexperienced investors may be seduced by such marketing hype.
    • Understanding how regulation today and in the future will impact on your strategy 
      • Being up to speed with recent regulations and anticipated future changes in legislation can help you to manage future risks.

  • Building a network of trusted providers (minimum 30 hours – though to do this properly takes years) 

    • Building a reliable and trustworthy network of contacts in the areas you want to invest in to help with sourcing (i.e. finding properties which match your requirements) and management
    • E.g. estate agents, plumbers, bank and finance contacts, solicitors, managing agents, and surveyors

  • Researching and analysing (minimum 40 hours initially, then minimum 2 hours per additional property)

    • Knowing where to look for data, which sources can be trusted and how to interpret the data
    • Understanding how to make credible assessments of the data
    • Knowing what numbers are realistically achievable and what a ‘good’ return on investment is for the kind of assets you’re looking at
    • Creating excel spreadsheets and other reports to efficiently analyse and allow you to compare multiple deals
    • Understanding how trends might affect areas differently in the future

  • Acquiring  (minimum 40 hours)

    • Finding and building a pipeline of  quality deals relies on your reputation and the network mentioned above
    • Successful negotiating doesn’t come naturally to everyone. It’s a skill, which relies on clear understanding of value and quick responses 
    • Pushing deals through to legal completion – this can require a lot of chasing and administrative work
    • Interpreting surveys and legal documentation, which can require you to have detailed knowledge so that you do not miss anything major and expensive (eg. a roof in need of replacement).

  • Managing (minimum 25 hours per annum overseeing outsourced managing agents)

    • Finding a good management team
      • There are historically low barriers to entry to lettings, so the quality of managing agents varies significantly – from excellent through to downright criminal
    • Managing the team – once you have identified your management team, you need to put time and effort into setting up the property (e.g. utilities) and team (e.g. automatically approved expenditure rules), and then ongoing oversight 
    • Staying on top finances – making sure you are paid the right amount at the right time
    • Staying on top of pre-planned maintenance – ensuring defects and improvements are dealt with in timely, cost effective manner

The truth is, many people don’t have any idea of the time and effort involved in building and managing a property portfolio, and won’t take all of this into account.

Time Is Money

For the kind of High Net Worth Individuals that we work with, ‘time is money’.  The opportunity cost of time spent building and managing property investments can be high.

To illustrate this, let’s assume an investor earns £150,000 per annum. This equates to an hourly rate of £96.15.

The time spent on the above activities would equate to 185 hours in the first year. Let’s say they analyse 10 properties before completing on their first deal. So that’s 205 hours in the first year @ £96.15 per hour = £19,710.75.

Note that due to a lack of experience and knowledge, this investor may be more likely to make mistakes which can easily cost hundreds of thousands of pounds. Further, necessary activities may take longer than the above estimation due to not having strong industry expertise.

The Alternative Approach - Trusted Professionals

The alternative is to work with trusted professionals. Within this, there are two main approaches:

  • You can work with a number of different service providers and oversee things yourself; or
  • You can work with one sole provider who oversees the work required, allowing you to be ‘hands-off’.

You may be able to save cash by working with numerous service providers. However, overseeing their work will require time and effort. It also increases the burden of due diligence since you need to evaluate different providers to ensure that you are getting the best value, and that they are properly skilled and experienced. Ultimately, working with a single provider can help to minimise the risk of things going wrong and save you from wasting time and money throughout the life cycle of your investments.

The Bottom Line

It’s not necessarily cost effective to ‘DIY’. Being ‘hands-on’ to save money on professional fees can be a false economy.

If you would like to discuss building your portfolio with SPI Capital, get in touch via info@spi.capital to arrange a confidential, no obligation conversation.

SPI Capital is a trading name of SPIC AM Limited (Company Registration No: 12831158)
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