How To Build A Passive Income Property Portfolio

Ever wondered if it was possible to build passive income by investing in property, without spending hours dealing with tenants or estate agents? How many properties do you need to retire on and achieve a 100% Passive Portfolio?

This is a question the majority of investors will consider at some stage. Ideally it’s a question you consider when you first start, but whenever you get round to it, it’s a question that varies for most people. As we all have different income targets, instead let’s look at if it’s even possible to get a 100% Passive Portfolio set up. That way you can just keep adding to the number of properties to get to the required level of income to live off.

Retirement Income

You’re all bright eyed and bushy tailed right now, but there will come a time when you can no longer be bothered dealing with tenant issues, handling property maintenance dilemmas or even getting out of your chair. Even further down the line, you may not have the capability let alone the desire to do any of these things. So what you need is a property income that is 100% passive and doesn’t require you involved at any stage.

We always talk about how property isn’t completely passive, and for the most part it’s true. If you consider any form of direct property ownership and compare it with say owning shares in a REIT – you are responsible for much more with property ownership and are required to make decisions that affect your portfolio. Having said that, we can systemise investments to such an extent that you can enjoy a near 100% passive income… but there is a price to pay for this.

The complete passive portfolio

When I talk about passive in this article, I am referring to passive FOR YOU. Someone is going to need to manage the day to day running of your portfolio, and someone will have to find tenants and respond to queries, etc. etc. So what you need is a full time property manager. While salaries vary, if we assume around £30k would get you a competent property manager, plus you’ll need some office expenses, so let’s call it £40k as a cost to you. Using the standard 10% of rent for management (12% when you include VAT), would mean you need a rental income of £333,333. Eek!

That’s around 37 properties assuming a rent of £750 per month. That doesn’t sound easily achievable, so what are the alternatives?

Use the full property management service Letting Agents provide? In theory, but as anyone who has ever rented a property can attest to, they are a bit like terrified children most of the time. They are constantly asking for permission, validation, and authority to do anything. For most people during their investing career, that’s fine. And a good agent will take away 95% of all the hassle for you. The problem comes with the other 5%. We’re aiming for passive income here. 

How to go completely passive

The stumbling block for property management companies is their inability to make decisions on your behalf. That’s fair, it’s not their job to second guess what you want them to do. So what you need in order to go completely passive is to hire a decision maker for you. We looked at the cost of hiring a full time decision maker and action taker – £40k. We could go the route of a part timer decision maker and action taker – say £20k and therefore require £166,667 of rental income. But that is still a significant portfolio! So a combined approach is probably the only way to go. We need some action takers and we need a decision maker.

 

Action Taker

We can use a property management company that will charge anywhere from 5% – 12% for full property management. There are likely to be the occasional additional cost here and there, but that’s about the extent of it. Or we can break down each task into separate items and find someone to do each of the tasks required.

  • Telephone answering – for queries and reporting maintenance issues
  • Emergency reactive maintenance – emergency call out services
  • Marketing and viewings of a vacant property
  • Minor pre-planned maintenance
  • Major pre-planned maintenance
  • Contractor selection and management
  • Insurance renewals
  • Key holding
  • Payment of suppliers
  • Project Manager

Each of these tasks can be carried out by a separate individual or company, so these are your Action takers. The final task on the list “Project Manager” refers in this instance to someone who manages all of the other Action takers. So they will oversee the person who is in charge of the Insurance renewals. It could well be the case that a lot of these tasks are handled by the same person, but there are key tasks and functions that must be assigned to someone. Have I missed any tasks off? If so, remind me in the comments section!

 

Decision Maker

Now to the scary part, delegating your decision making powers to someone else. Ultimately you are always going to be the main decision maker, but you can outsource some of the smaller decisions to someone else. Hopefully it will be someone experienced, but failing that, someone who knows you and your situation and desires. This is potentially a long term relationship, so it’s worth dedicating the time and effort up front. There are a number of options here, so let’s consider them in turn.

Professional Property Manager

This is an industry professional who you give authority to for the management of your portfolio. They may well be an Action Taker as well, but you will authorise this person to maintain the upkeep of the building by spending whatever it takes on reactive and planned maintenance, you will allow them to select the best tenant type for your property, and the best agent. You may even go as far as to allow them to choose when to dispose of a property and when to acquire one. There is a very high degree of trust needed in this person, as they have the potential to ruin your fortune very quickly if left alone. 

This is what the super rich have done for years in order to gain passive income. Do you really think the Duke of Westminster has a hand in deciding tenants for his properties? Of course not, they employ Estate Managers instead. 

Personal Assistant

This role is less likely to be filled by someone carrying out any of the Action Taker roles, but instead is a personal assistant to you. The super wealthy use PA’s of varying levels to manage aspects of their lives, from organising nights out to the theatre, to what house to buy and what investments to make. The more intelligent a PA you need, the more money you can expect to pay. However given property isn’t rocket science, you can put systems in place to have a reasonably priced PA carry out this task to a large extent.

Also keep in mind that the more you pay for this individual, the easier it will be to secure that passive income. 

Checks and Balances

The most important factor is to ensure all of their tasks are recorded and reported on. What was the issue, what was the action, what was the logic behind the decision? That way you can review the decisions periodically, agree the action taken or suggest an alternative approach should the issue come up again. You will also be able to replace the PA by providing the new one with this document. Initially it is up to you to be the checker of all actions and decisions, but as the PA gets more and more experience, you’ll find you can go from daily, to monthly to quarterly to annual checks. Where significant financial control is handed over to your Decision Maker, it makes sense to include a third party to check on their decisions. A trusted accountant or solicitor would be the most appropriate for this role, as they can step into your shoes and provide a degree of checks and balance.

 

So how many properties does it take?

The start of this blog I said we’d figure out what the minimum number of properties are required to run a virtually 100% passive portfolio… And the answer is…. 1. Think about it. If we can agree that the Action Takers can be individual tasks, or just a property management company, then we’re looking at 12% of the rent. If we want to outsource the decision making to a PA, then it’s in the region of £25 per hour for a half decent UK based virtual PA. There are unlikely to be that many issues occurring at the property that the management company can’t handle, but if they needed to talk to “you” once a week for an hour, that’s £100 per month. So showing the numbers on a 6.5% yielding cheap property;

 

Purchase Price £60,000.00
 Mortgage £45,000.00
 Rent £325.00
 Mortgage £150.00
 Gross Profit £175.00
 Management  costs £39.00
 PA costs £100.00
 Net Profit£   36.00

 

Not exactly setting the world on fire here are we, but the point stands. You would have virtually no involvement with that property initially, and could eventually get to the stage of having no involvement with it. You would be entirely reliant on capital appreciation now from this asset, but the PA costs are unlikely to rise in line with the number of properties in your portfolio. 1 hour per day is likely to be the most you’d ever need. That equates to £540 per month. So once you have more than 6 properties you can effectively remove the PA costs from the equation. If we use a more standard investment property;

 

Purchase Price £125,000.00
 Mortgage £93,750.00
 Rent £677.08
 Mortgage £312.50
 Gross Profit £364.58
 Management  costs £81.25
 PA costs £100.00
 Net Profit £183.33

 

The returns are lower than you may expect at 2.9% ROI in the first instance and 7% ROI in the second, but remember that we should now be in a position to spend virtually no time on the management of the portfolio.

Conclusion

So the 100% Passive Portfolio does exist… eventually. If you save up for years and suddenly buy a portfolio of £1m and expect to be able to go completely passive, that’s unlikely. Even the best professional won’t know what you want unless you tell them, so there is always a learning curve. The best bet then is to start building that team up over a number of years to get them to the stage where they know what you’d say if they asked them, so they just make the decision on your behalf.

Is all of this worth it for more than the income you would receive from a REIT? You can relatively safely achieve around 4-5% return from investment via equities but still in property. The downside to this is the lack of growth brought about through leverage. However it’s not unreasonable to ask if you want 75% LTV when you’re 75… or are you hoping to have sold your assets in order to pay down all debt and be left with an unencumbered asset? There is a very strong argument for liquidating your entire portfolio when you come to retirement and buying high yielding REITs instead to provide you with an income. That is entirely passive in nature, and there is less chance of a REIT becoming worthless than say a high yield share investment, purely due to the underlying assets.

What will I do when I’m really retiring? I don’t know yet. I like the idea of having so much money that you can put it in a low risk, low return vehicle and still live happily ever after. If that’s not a reality though, I’m likely to remain invested in property in some form to benefit from the requirement people have of somewhere to live and work! Come back in 50 years to find out the answer!  

Until next time, don’t age too fast.

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PS – So since I wrote this article a fair few people have come to me and asked if it’s something I can help them with. 

The quick answer is YES! If you are looking for help building your own portfolio then absolutely I can help you. 

If you’ve really taken on board the passive side of things and want to employ me to build the portfolio for you instead, then that’s something I can offer too. 

Get in touch and we can discuss how you can go about building a portfolio yourself, with as little or as much time commitment from you!

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