Investing in property for the first time?
Investing in property is an attractive prospect for many – with reports of a booming sales market and ever-increasing rent levels – it seems to be an easy route to making money. However, buying an investment property can be a complicated, time-consuming and expensive process. Whether you are a new investor or a seasoned portfolio landlord, it’s crucial that you understand the buying process and exactly what is involved in eventually letting a property.
Why invest in Edinburgh
Edinburgh offers many fantastic opportunities for anyone considering buy-to-let property investment. The city has a growing population – predicted to reach 583,140 by 2041 – and an ongoing shortage of quality lettings stock, creating a buoyant buy-to-let market with the potential to achieve a strong return on investment. Additionally, there are over 60,600 students studying in Edinburgh and only 19,000 purpose-built student accommodation rooms.
At Clan Gordon, we know the Edinburgh property market inside out and have a property investment team ready to help with any buy-to-let questions you may have. Find out more about our property investment service.
1. Deposit and mortgage
Buying an investment property is different from purchasing a home that you are going to live in yourself. One of the first differences you will discover is that you will require a larger deposit than you would to buy your own home.
In addition to a larger deposit, your investment property will also require a specific buy to let mortgage. The rates for buy to let mortgages are generally higher than residential mortgages. Knowing what these costs are likely to be in advance will help you decide if the investment is viable.
2. Buying in Scotland
As an investor, this may be your first experience of buying a property in Scotland. If so, have a chat with a local Solicitor or sales agent to ensure that you are up to speed on the process of buying a property.
One of the main differences between the Scottish market and the rest of the UK is ‘offers over’ pricing – in the competitive Edinburgh market some properties can sell for vastly over the advertised price. You require a Solicitor to submit an offer on a property, choosing a local Solicitor, who knows the market well, will help guide you on where you should position your offer.
Everyone buying a property in Scotland pays Land and Buildings Transaction Tax (LBTT) on the purchase, the cost of which is dependent on the cost of the property. Since 2016, investors must also pay an additional 3% of the purchase price, on top of the existing Land and Buildings Transaction Tax, for a buy-to-let property.
4. Where (and what) to buy
Market research is essential when buying an investment property; you have to be sure that both the area and the property will appeal to tenants. The first step in narrowing down your property search is usually to decide which type of tenant you would ideally like to rent to, this will dictate the area and property type. For example, a city centre one or two bedroom flat will appeal to young professionals, whereas a house in the catchment area for a good school will attract families. Different types of tenants also value (and will likely pay more for) different property features, for example, student tenants may value an ensuite bathroom but be less interested in a private garden.
When choosing a location on which to focus your property search, you should consider what amenities are nearby such as; transport links, schools and universities, bars, restaurants and leisure options.
Our property investment team can source properties on your behalf and advise on the best location to meet your budget and specifications. Find out more about our property investment service.
5. Rental yield
Generating income is the primary goal for most buy-to-let investors. Calculating the gross rental yield is an important step in deciding if a property is a viable opportunity for you. A typical gross rental yield in Edinburgh city centre tends to be between 4% and 6%. There are some areas, out with the city centre, where property values may be lower, but tenant demand is increasing due to a lack of quality stock, meaning that higher rental yields can be achieved.
Find out more about rental yield and how to calculate the gross and net rental yield here.
6. Rental income variations
Before purchasing a property for buy-to-let you will likely have it valued for rent. A local letting agent will usually be happy to take a look at the property, either by visiting it or looking at the advert and comparing with properties recently let in the area. This will give you a good idea of what income you can expect, however, rent levels can fluctuate throughout the year – tending to be higher for tenancies beginning in summer months and lower in winter. Your property will also have void periods, where it is not tenanted but you still have to cover the mortgage payments. Most void periods will be short, just a few days in between tenancies, but can be longer if the property fails to let quickly, so it is essential to prepare for periods without an income.
Buying a property in need of renovation work can be a good opportunity to secure a property for a lower price, and achieve a higher rental yield. Newly renovated properties are in high demand across Edinburgh, can attract higher rents and encourage tenants to look after the property and rent for longer. It is important to be realistic in terms of your budget and the timescales required to complete work.
8. Safety certificates and ongoing maintenance
As you will already be aware, there are considerable costs involved in purchasing a buy-to-let property and getting it ready for tenants to move in. However, it is important to remember that outgoings will not stop there. Even the best-maintained properties require maintenance from time to time – whether it is repairing a washing machine or an emergency Locksmith when the lock fails – and as the landlord, it is your responsibility to cover these costs. The rent paid by your tenants will likely cover the cost of most repairs, however, it is important to factor in these additional costs, especially if you are relying on rent payments to cover your mortgage.
9. Landlord insurance
As a landlord, you will require specialist landlord insurance to ensure that your investment is protected. A standard home insurance policy – buildings insurance, contents insurance, or a combination of the two – will most likely not cover tenanted properties, leaving you uninsured (and potentially breaking the terms of your mortgage) if you need to make a claim.
In addition to buildings and contents cover, a landlords insurance policy will have additional benefits – such as accidental damage and loss of rental income – and will be tailored to meet your needs as a landlord. Tenants are responsible for having their own contents insurance to protect their personal items.
10. What will your role be?
Once you have a property, and you are ready to find tenants, you have a decision to make on how hands on you will be with your tenancies. You can either be an active landlord, working directly with tenants to manage their tenancy and any maintenance issues, or create a passive income stream by appointing a letting agent.
Tenants pay a considerable amount each month to rent a property, and so, they deserve to have a contact who will resolve maintenance issues and deal with any other queries quickly before, during and after their tenancy. Managing a property is a big commitment, so it is best to know in advance what you intend your role to be.
Many landlords choose to have a letting agent manage their property, predominantly to save themselves time and to ensure that their property remains compliant with (ever-changing) regulations. If you do decide to use a letting agent, you must factor in the agents’ fees. The fees charged can vary greatly from agent to agent, but a good guide price would be between 10% and 13% (+VAT) of the monthly rental income.