Building a Commercial Property Portfolio: Finance Strategies

The Case for Building a Commercial Property Portfolio

**Portfolio investing** in commercial property offers significant advantages over holding individual assets. Diversification across property types, locations, and tenants reduces concentration risk, while the compounding effects of rental growth, capital appreciation, and equity recycling can build substantial wealth over time.

Many of the UK's most successful property investors started with a single asset and systematically built portfolios through disciplined reinvestment and strategic use of finance. The finance strategies you employ are as important as the properties you select - they determine your growth rate, risk exposure, and long-term returns.

This guide covers the financing approaches used by portfolio builders, from leveraging your first purchase to managing a multi-asset portfolio with a mix of [commercial mortgages](/services/commercial-mortgages), [bridging finance](/services/commercial-bridging), and equity release strategies.

Starting Your Portfolio: The First Purchase

Your first commercial property sets the foundation for everything that follows. Key considerations for the first acquisition:

Choose an Asset That Enables Growth

Your first property should be more than just a standalone investment - it should be a platform for portfolio growth:

• Strong income - reliable rental income that comfortably services the debt
• Good tenant covenant - reduces vacancy risk and supports future refinancing
• Value-add potential - scope for rental growth, improvement, or repositioning
• Refinanceable - a property that mainstream lenders will readily secure against
• Manageable complexity - simple enough to manage while you learn the market

For a detailed introduction to commercial property investing, see our [beginner's guide to commercial property investment](/knowledge-hub/commercial-property-investment-beginners-guide).

Finance the First Purchase Efficiently

The structure of your first [commercial mortgage](/services/commercial-mortgages) affects your ability to grow:

• Interest-only rather than repayment - preserves cash flow for reinvestment
• No early redemption charges (or short lock-in periods) - allows refinancing as values grow
• Flexible terms - ability to release equity later without full refinance
• Moderate LTV (60-65%) - leaves headroom for value fluctuations

**Key Takeaway:** Your first property purchase is about building a base for growth, not maximising yield on a single asset. Prioritise quality, reliability, and the ability to leverage the asset for future acquisitions.

Growth Strategy 1: Equity Recycling

**Equity recycling** is the most common strategy for building a property portfolio through leverage. It works by releasing accumulated equity from existing properties to fund deposits on new acquisitions.

How It Works

1. Purchase Property A with a 35% deposit and 65% LTV mortgage
2. Add value through active management (rent reviews, lease renewals, refurbishment)
3. Property A appreciates in value through market growth and/or active management
4. Refinance Property A at the new, higher value, releasing equity
5. Use released equity as the deposit for Property B
6. Repeat the process across the growing portfolio

Worked Example

**Year 1: Property A**

• Purchase price: £500,000
• Mortgage (65% LTV): £325,000
• Deposit: £175,000
• Annual rent: £37,500 (7.5% yield)

**Year 3: Refinance Property A**

• Current value: £600,000 (20% appreciation through rent review and market growth)
• New mortgage (65% LTV): £390,000
• Old mortgage balance: £325,000
• Equity released: £65,000
• Equity still in Property A: £210,000

**Year 3: Purchase Property B**

• Purchase price: £400,000
• Mortgage (65% LTV): £260,000
• Deposit (using released equity): £140,000
• Additional cash required: £75,000

After two cycles, you hold two properties worth £1,000,000 with equity of approximately £350,000, up from your original £175,000 investment.

The Power of Compounding

Over a 10-15 year period, systematic equity recycling combined with rental growth and capital appreciation can build a substantial portfolio from modest beginnings. The key is consistency and discipline:

• Reinvest released equity rather than consuming it
• Maintain prudent LTV ratios (do not over-leverage)
• Focus on properties with genuine growth potential
• Time refinances when values are strong and rates are competitive

**Key Takeaway:** Equity recycling is a marathon, not a sprint. Each cycle takes 2-4 years to generate meaningful equity release. Patience and consistency are more important than trying to maximise leverage on every property.

Growth Strategy 2: Bridging to Buy, Mortgage to Hold

This strategy uses [bridging finance](/services/commercial-bridging) for fast acquisitions and then refinances to a [commercial mortgage](/services/commercial-mortgages) for long-term holding.

When It Works Best

• Auction purchases requiring completion in 28 days
• Off-market deals where speed secures a better price
• Properties needing work before they qualify for a commercial mortgage (vacant, short lease, refurbishment needed)
• Competitive situations where a fast cash-like completion wins the deal

How It Works

1. Purchase with bridging finance (70-75% LTV, 9-12% rate)
2. Carry out any necessary work (refurbishment, letting, lease negotiation)
3. Once the property is stabilised (let, refurbished, good lease), refinance to a commercial mortgage (60-70% LTV, 5-8% rate)
4. The commercial mortgage repays the bridge, and the property becomes a long-term hold

Cost Consideration

The bridging period is expensive but typically short (3-6 months). The total cost of bridging for 6 months on a £300,000 loan at 10%:

• Interest: approximately £15,000
• Arrangement fee (1.5%): £4,500
• Exit fee (1%): £3,000
• Total bridging cost: approximately £22,500

This cost is justified if the bridging-enabled purchase price is substantially below what the property would cost through conventional channels, or if the property cannot be financed conventionally in its current state.

Growth Strategy 3: Value-Add and Refurbishment

Actively improving properties to increase their value is one of the most effective portfolio growth strategies.

Types of Value-Add

• Lease engineering - extending lease terms, improving covenants, removing breaks
• Rent review prosecution - actively pursuing rent reviews to market levels
• Refurbishment - improving specification to command higher rents
• Change of use - converting from a lower-value to a higher-value use
• Subdivision - splitting larger units to attract a wider occupier base
• Extension - adding floor area to increase rental income

Finance for Value-Add

• Light refurbishment: Funded within a standard bridging facility or from cash reserves
• Heavy refurbishment: Requires specialist heavy refurb finance with staged drawdowns
• Conversions and extensions: May require development finance depending on the scale

Worked Example: Lease Engineering

**Before:**

• Property let at £30,000 pa with 2 years remaining on the lease
• Valued at 9% yield = £333,000 (short lease depresses value)

**After:** (negotiate a new 10-year lease with the tenant at market rent)

• New lease at £35,000 pa with 10 years term certain
• Valued at 6.5% yield = £538,000 (longer lease and higher rent increase value)

**Value created: £205,000** through lease negotiation alone, with no construction cost.

**Key Takeaway:** Value-add strategies create equity that can be recycled into further acquisitions. The most effective value-add does not always involve construction - lease engineering and rent reviews can create substantial value at minimal cost.

Growth Strategy 4: Development and Retain

Developing properties and retaining them for the portfolio rather than selling creates assets at below-market cost.

How It Works

1. Identify a development opportunity (conversion, ground-up, refurbishment)
2. Fund with development finance
3. On completion, refinance to a commercial mortgage based on the completed value
4. The difference between the development cost and the completed value becomes equity in the portfolio

Worked Example

• Development cost (land + build + finance): £1,200,000
• Completed value: £1,650,000
• Equity created: £450,000
• Commercial mortgage (65% LTV): £1,072,500
• Cash equity remaining in the asset: £577,500
• Net equity created (above cost): £450,000

This strategy is particularly powerful because you create the asset at cost rather than buying it at market value. The development profit becomes permanent equity in your portfolio.

Portfolio Finance Management

Multi-Property Lending

As your portfolio grows, consider lenders who offer **portfolio facilities**:

• Single charge over multiple properties - simplifies legal structure
• Cross-collateralisation - stronger properties support weaker ones
• Portfolio-level LTV - individual properties may exceed normal LTV limits if the portfolio average is within range
• Relationship pricing - larger portfolio facilities may attract better rates

Diversifying Lender Relationships

Conversely, some portfolio investors prefer to **spread lending across multiple lenders**:

• No single lender controls the entire portfolio
• Flexibility to refinance individual properties without affecting others
• Protection against a single lender changing their appetite
• Ability to use the most competitive lender for each property

The optimal approach depends on your portfolio size, growth plans, and risk appetite.

Fixed vs Variable Rate Across the Portfolio

Portfolio investors often use a **blended rate strategy**:

• Fix a core of the portfolio (50-70%) for certainty of cash flow
• Leave the balance on variable rates for flexibility and rate-cut benefit
• Stagger fixed rate expiry dates to avoid "renewal cliff edges"
• Review the fixed/variable balance annually in line with market conditions

See our guide on [how interest rate changes affect commercial property](/knowledge-hub/interest-rate-changes-commercial-property) for more on rate strategy.

Interest Cover Management

As your portfolio grows, lender **Interest Cover Ratio (ICR)** requirements become a portfolio-level consideration:

• Most lenders require ICR of 1.25x to 1.50x
• Monitor ICR across the portfolio, not just individual properties
• Properties with strong ICR can offset weaker properties in a portfolio facility
• Rising rents improve ICR; rising rates reduce it

Risk Management for Portfolio Investors

Concentration Risk

Avoid over-concentration in:

• Single tenant - if they default, multiple properties are affected
• Single sector - sector downturns affect the entire portfolio
• Single location - local market weakness hits all assets
• Single lease expiry date - multiple voids at the same time

Leverage Management

Maintain prudent portfolio-level leverage:

• Target portfolio LTV: 50-60% (lower than individual property maximums)
• Cash reserve: Maintain 6-12 months of debt service as a cash buffer
• Stress test: Ensure the portfolio can withstand a 20% value decline and a 2% rate increase simultaneously

Void and Tenant Risk

Plan for tenant turnover:

• Budget for void periods (typically 3-6 months between tenants)
• Maintain property condition to minimise re-letting periods
• Diversify tenant mix to avoid single-tenant dependency
• Build relationships with letting agents in each market

Exit Planning

Every property in the portfolio should have a clear exit strategy:

• Hold for income - long-term retention with ongoing refinancing
• Sell at maturity - dispose when the lease is at its strongest (long unexpired term)
• Reposition and sell - add value then sell to crystallise the gain
• Dispose of underperformers - prune the portfolio of assets that no longer fit the strategy

**Key Takeaway:** Building a portfolio is not just about acquiring more properties. Active management - refinancing, value-add, lease engineering, and disposal of underperformers - is equally important. The most successful portfolio investors treat their portfolio as a living, evolving entity.

Structuring Your Portfolio: Personal vs Corporate

Personal Ownership

• Simpler structure
• Rental income taxed at personal rates
• Capital Gains Tax on disposal (with annual allowance)
• Full mortgage interest deduction against commercial property income

Limited Company (SPV per Property or Portfolio Company)

• Corporation Tax on rental profits (lower rate)
• Full mortgage interest deduction as a business expense
• Flexibility for profit extraction (dividends, salary, pension contributions)
• Easier to bring in investors or partners
• Potentially more tax-efficient for higher-rate taxpayers

The optimal structure depends on your personal tax position, growth plans, and exit strategy. Take specialist tax advice before establishing your portfolio structure.

Working with Lenders as Your Portfolio Grows

As your portfolio grows, lender relationships become increasingly important. A specialist broker who understands portfolio lending can:

• Structure your lending across the most appropriate lenders
• Manage refinancing cycles to optimise rates and terms
• Advise on portfolio-level leverage and risk management
• Negotiate improved terms as your portfolio strengthens
• Access portfolio-specific products from specialist lenders

[Contact our team](/contact) to discuss your portfolio growth strategy and financing options. Use our [commercial mortgage calculator](/calculators/commercial-mortgage) to model different scenarios.

Summary

Building a commercial property portfolio through strategic use of finance is a proven path to long-term wealth creation. The key strategies - equity recycling, bridge-to-hold, value-add, and develop-to-retain - each use different finance products to create and leverage equity.

Success requires patience, discipline, and a systematic approach: start with quality assets, add value through active management, recycle equity into further acquisitions, and maintain prudent leverage levels throughout. The compounding effects of rental growth, capital appreciation, and equity recycling can transform a single property purchase into a substantial portfolio over time.

*Written by Matt Lenzie, Founder of Commercial Mortgages Broker. Ex-Lloyds Bank & Bank of Scotland.*