Are you considering an Edinburgh property investment or have you been a landlord for a number of years?
How do you determine if investing in property makes financial sense and if your portfolio continues to perform well?
Rick McCann, Director ofAt Home In Edinburgh, and local mortgage expert Ross Stisi, Managing Director ofStisi Group, have identified five key metrics to monitor on an annual basis.
1. Gross yield
Gross yield allows you see where your investment sits against the local and national averages, in terms of the rental income it generates as a proportion of the value.
To calculate gross yield, take your annual rental income figure and divide it by the current property value. Finally, multiply by 100 to find your percentage.
Example:
| Annual rental income | Property value | Gross yield |
| £1,000 per month x 12 = £12,000 | £240,000 | 5.0% |
| £1,250 per month x 12 = £15,000 | £200,000 | 7.5% |
The gross yield figure should hold fairly steady, assuming rental income and the property value are both rising. If your gross yield is below the regional or national average figure, the actual monetary amount of capital growth could make up for it. This tends to be the case in London, where yields are the lowest in the country, but capital values mean landlords usually benefit from good equity growth overtime.
Scotland tends to offer higher average yields than England and Wales, as found in TotallyMoney’s Q4 2018 survey.
Edinburgh property investment offers top gross yields
The below survey compiles the top ten buy-to-let areas in Scotland – with half in Edinburgh. Totally Money attributes this in part to the pulling power of universities; Glasgow and Aberdeen postcodes are also doing well. Here’s the full list:
| Rank | Postcode | Area | Properties for rent | Average monthly rental value | Properties for sale | Average asking price | Yield |
| 1 | AB11 | Aberdeen | 243 | £660 | 68 | £116,110 | 6.82% |
| 2 | EH11 | Edinburgh | 51 | £1,009 | 58 | £182,399 | 6.64% |
| 3 | G20 | Glasgow | 30 | £810 | 79 | £146,841 | 6.62% |
| 4 | G12 | Glasgow | 62 | £1,112 | 56 | £208,838 | 6.39% |
| 5 | AB24 | Aberdeen | 322 | £689 | 96 | £131,134 | 6.31% |
| 6 | EH6 | Edinburgh | 73 | £1,060 | 125 | £204,295 | 6.23% |
| 7 | EH3 | Edinburgh | 138 | £1,923 | 75 | £373,044 | 6.19% |
| 8 | EH7 | Edinburgh | 80 | £1,197 | 112 | £238,446 | 6.02% |
| 9 | EH8 | Edinburgh | 33 | £1,245 | 45 | £249,304 | 5.99% |
| 10 | G3 | Glasgow | 39 | £1,001 | 60 | £202,303 | 5.94% |
Q4 2018 Best buy-to-let areas in Scotland –http://www.totallymoney.com/buy-to-let-yield-map/
It’s clear that Scotland’s capital is a sound location for buy-to-let properties, and it’s worth a closer examination of rental yields by postcode if you’re considering an Edinburgh property investment:
| Area | Average yield | Average price | 5 yr +/- | Area | Average yield | Average price | 5 yr +/- | |
| EH3 | 4.6% | £365,010 | +27% | EH13 | 3.8% | £258,178 | +25% | |
| EH4 | 4.6% | £305,558 | +27% | EH14 | 4.2% | £281,340 | +25% | |
| EH5 | 5.3% | £199,195 | +26% | EH15 | 4.3% | £246,789 | +26% | |
| EH6 | 5.2% | £204,016 | +27% | EH16 | 5.0% | £252,045 | +26% | |
| EH7 | 5.0% | £238,470 | +26% | EH21 | 4.5% | £216,756 | +25% | |
| EH8 | 6.3% | £215,333 | +26% | EH22 | 3.5% | £283,870 | +25% | |
| EH9 | 4.4% | £335,778 | +26% | EH48 | 4.7% | £166,908 | +25% | |
| EH10 | 4.0% | £388,906 | +27% | EH49 | 3.8% | £241,418 | +25% | |
| EH11 | 5.5% | £193,574 | +25% | EH54 | 4.2% | £185,081 | +23% | |
| EH12 | 4.0% | £335,249 | +24% |
Rental yields in Edinburgh, by postcode – PropertyData.co.uk
At Home In Edinburgh are experts in the local buy-to-let market, and can advise on the best locations in Edinburgh to invest. In addition, we offer a free, no obligation, Buy-to-Let Assessment service.
2. Average monthly profit from rental income
Most rental incomes are reasonably stable but you do need to factor in vacant periods. Your monthly expenditure will naturally vary but average it out over the year and track how it changes. Make sure you have included all regular expenditure and made deductions for tax.
Once you have an accurate picture of the profit you’re making month on month, you can budget to ensure you have enough in the bank for the inevitable one-off expenses such as replacing appliances and small maintenance jobs.
Using a good letting agent, such as At Home In Edinburgh, can help ensure that maintenance is managed so that any issues can be resolved before they become bigger problems. Following regular inspections, you can expect advice on current and future repairs & maintenance requirements so that you can remain in control of your finances.
3. Capital growth
You can search on various property sites and the Land Registry to find out how house prices are performing in your postcode area and a good local agent should be happy to give you a free market appraisal.
If your capital value doesn’t seem to be keeping up with local averages, you may need to spend money on making some improvements. Take advice from letting agents, like At Home In Edinburgh, to find out where spending money might allow you to both increase the rent and reduce void periods.
4. Loan to Value (LTV)
Since portfolio lending criteria changed in September 2017, it’s become even more important for landlords with four or more properties to keep track of how much they’re borrowing in relation to the value of their properties.
If that’s you, and you’re looking to switch to a new buy-to-let product or make a new purchase, remember that your total borrowing cannot exceed 75% of the total portfolio value.
Stisi Group provides a good explanation of the criteria changes, as lenders must now ensure that you are not over-exposed, and will consider:
- Your property investment experience
- The total amount of your mortgage borrowing across all properties
- Your assets and liabilities, including tax liability
- The merits of any new lending in context of your existing buy to let portfolio, together with your business plan
- Historical and future expected cash flow from your portfolio
- Your income, both from property and elsewhere
Even if you only have one or two properties, the lower the LTV, the better interest rates you should be able to secure. So, for example, if you bought a property for £170,000 with a 70% LTV interest-only mortgage 5 years ago and your property is now worth £210,000, your borrowing is now at just over 55% and it may be worth remortgaging to reduce your monthly payment.
Stisi Group’s advisers can give you a no-obligation portfolio review.
5. Return on investment
This lets you see how your Edinburgh property investment compares to other forms of financial investment or even another type of property.
Calculate your total annual return (your annual profit from rental income plus your annual capital growth), and divide it by the amount of capital you have invested in the property (the deposit, purchase fees and the cost of refurbishment and other improvements). Finally, multiply by 100 to find your percentage.
Example:
| Capital invested | Deposit | £45,000 |
| Purchase costs (include second home supplement) | £ 4,000 | |
| Refurbishment | £ 9,000 | |
| Total investment | £58,000 | |
| Annual profit from rental income | £ 2,500 | |
| Annual capital growth | £ 8,000 | |
| Total annual return | £10,500 | |
| Return on investment (ROI) | (£10,500/£58,000) x100 | 18% |
Summary
Considering these five metrics together, you’ll gain a clear overview of your rental property portfolio’s performance, and assess:
- how much profit you’re making each month and year
- how well your property investment is performing against local and national averages
- how your property investment is performing against other investment categories e.g. shares
- whether you could be making a saving on your mortgage
- if you’re able to release some equity to reinvest
Our teams at Stisi Group and At Home In Edinburgh are experts at what they do, and are always happy to help. If you’d like an informal chat or a no-obligation review, then please get in touch.
You can contact Rick and Ross at:
Rick – At Home In Edinburgh:
- [email protected]
- 0131 229 4001
Ross – Stisi Group:
- [email protected]
- 0131 510 1240
Your home may be repossessed if you do not keep up repayments on your mortgage.
There may be a fee for mortgage advice. The actual amount you pay will depend upon your circumstances. The fee is up to 1% but a typical fee is 0.3% of the amount borrowed.