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The Risk of Over-stretching a Property Portfolio

By: Scott McBride - Updated: 1 Oct 2012 | comments*Discuss
Property Investment Portfolio Housing

Build up an investment property portfolio too quickly and it can come crashing down like a pack of cards. When an investor has been successful with one buy-to-let property, there can be a strong temptation to add to the portfolio right away, but taking on too much too soon can wreck investment plans.

An investor must ensure he has the finances in place to fund an additional purchase before moving forward. Most investors buy their first property by saving enough for a large deposit – typically around 30 per cent of the purchase price – surveyor’s fees and legal fees. The bulk of the purchase is then funded by a buy-to-let mortgage from a bank or building society.

If the housing market is buoyant, an investor may find his property’s value increases rapidly. At this point, the investor has the option to remortgage his first property, releasing some of the equity tied up in it, and use these funds as a deposit on a second investment property.

Bigger Mortgage Repayments

This is when a property investor can come unstuck. It is important to remember that by remortgaging his first property, the investor will face bigger mortgage repayments. This may mean that the rent collected from tenants is no longer enough to cover the mortgage repayments on the first property.

There can be additional strains on an investor’s finances at this time. For instance, perhaps the second property has to be renovated to make it suitable to let. Even if the property requires little work, it may take a considerable time for appropriate tenants to be found and for rent money to start rolling in.

If an investor’s finances become over-stretched, he may struggle to make remortgage payments. This could force the investor to sell one or both of his properties quickly – possibly at a loss – or face the threat of repossession. There can be further complications if the investor has to honour a lease agreement before putting the property up for sale.

Dream Turns Sour

In short, it can mean the investment dream turning into a nightmare, and all because the investor was too impatient. After all, most of these risks can be reduced or eliminated altogether if the investor has sufficient funds in place before adding to his property portfolio. So whenever adding to an investment property portfolio, try to have a contingency fund in place to deal with any eventuality.

Remember too that it is not only finances that can be strained when adding to an investment property portfolio. An extra property will mean extra work and so an investor must have the time and energy needed to make the investment a success.

Even an investor who calls on lawyers, surveyors, builders, decorators and letting agents to get his paperwork, property and tenants in order will spend a considerable amount of time coordinating the project. Unless an investor has the money, time and energy required to get the investment up and running, it will cause expensive delays at best and force a resale or repossession at worst.

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