Selling vs Renting Property in Edinburgh
When someone inherits a property in Edinburgh or they move home but retain ownership of their previous property, they have a decision to make about what to do with the empty property. Assuming they don’t want to keep it as a second home with all the extra expense involved, most people will choose to either sell the property or keep it and rent it out. Here are some things that should be taken in to account when making this decision.
The main reason for selling a property is to realise the value of the property by turning it into cash. Sellers may also want to remove the hassle of the responsibility that comes with owning an additional property.
The negative aspects of going down the sales route are; the large costs associated with selling the property including estate agency and legal fees, the cost of home reports and any work required to get the property ready for the sales market (i.e. redecorating) and the capital gains tax implications of selling. Some of these costs can be covered by the proceeds from the sale but most of them will have to paid in advance and regardless of whether the property sells. The risk of the property not selling are more than just the costs of advertising the property as there will be months of lost potential rental income and ongoing costs such as council tax to be covered. It takes much longer to sell a property in Edinburgh than to rent it. In Edinburgh, the average time for a property to be on the sales market is around 100 days compared to less than 3 weeks for rental.
An owner should also consider whether they might invest in property in the future as a 3% Additional Dwelling Supplement (ADS) is payable when purchasing an investment property. By holding onto a property already owned this future cost can be avoided but selling now and buying an investment property in the future would mean an additional 3% tax payable on top of the Land and Buildings Transaction Tax.
|Pros of selling (Positives)||Cons of selling (Negatives)|
|Realise cash||Higher costs: Estate agency and legal fees plus other outlays to get the property sale-ready (like home report or redecorating)|
|No longer responsible for the property||No long-term benefit in the increasing property value|
|Risk of advertising but not selling (cost plus loss of income)|
|Longer timescale of around 100 days (5 times longer than renting)|
|3% ADS tax payable on future BTL purchase|
Continuing to own the property and rent it out means that the owner will benefit from future capital growth in the value of the property (11.2% in the last 12 months according to the Registrars of Scotland) as well as benefiting from an additional monthly income (the average monthly rent in Edinburgh is currently £1,062 according to Citylets).
There are some additional annual costs related with renting the property (such as letting agency fees, legal certificates, maintenance & repairs of the property) which account for around 20% of the annual income. On the other hand, the responsibility for council tax, utilities, wifi and TV license is born by the tenant so the ongoing costs to the landlord are minimal.
The timescales are much quicker for renting the property and generating an income compared to selling. Most 1-2 bedroom properties in Edinburgh will rent within a week or two so the landlord can expect an income within a month of making the decision.
There are some upfront costs to getting the flat ready for rental (such as smoke alarm installation and gas safety certificates) but these items cost much less than the sales equivalents and can be paid by invoice from the rental account so the owner does not need to find the cash upfront.
There is an ongoing responsibility to maintain the property and look after the tenancy but a good letting agency will take care of these things and make sure things run smoothly.
|Pros of renting (Positives)||Cons of renting (Negatives)|
|Regular monthly income||Additional responsibility for the property in the future|
|Increasing asset value of the property|
|Faster turnaround (5 times faster than selling)|
|No cash required upfront|
|A letting agency can take care of any hassle in managing|
|No 3% ADS tax on purchase as the property is already owned|
Which option is better?
In summary, unless there is a good reason that a property owner wants to realise the cash in their property, then the best thing to do is appoint a good letting agency and benefit from the strong economic factors surrounding the long-term rental market in Edinburgh.