One camp believes that houses are the best investment because they don’t like paying ground rent or service charge on flats, or because they don’t like the lack of control/dealing with the freeholder on what they perceive to be expensive maintenance issues, or because they don’t like the proximity of other tenants/noise in the building.
Some older investors believe (incorrectly) that you must return apartments at the end of the lease and that they are therefore a waste asset (in reality you can always force the freeholder to extend the lease).
Then there’s the side that believes flats are the best investment since they often have greater returns (lower purchase price) and need less upkeep because the freeholder handles them.
The list below represents some observations of each form of investment property, but it’s not intended to be comprehensive.
Benefits of Investing in Flats
The benefits of purchasing a flat as an investment property are listed below in bullet points.
– In general, entry purchase prices are cheaper than similar homes.
– You can get a high quality apartment for around two-thirds of the price of a home.
– Higher cash-on-cash returns and yields in the past
– Since a result of changing lifestyle patterns, renting apartments may become more popular, resulting in fewer vacancies, as young people and those without children frequently choose them.
– Building maintenance costs are shared, and the freeholder (or managing agent) is usually in charge of organising the work.
– Short leases and an absent freeholder may all make an investment appealing if you try to wrestle the freehold from the owner by enfranchising and purchasing the freehold with others in the block.
– Purchasing apartments with failed management firms may be inexpensive since they are frequently unmortgageable; solve the issue, and the value rises.
– Because flats are less expensive, it’s simpler to purchase a big number of them to build up your portfolio.
– You can spread your risk out further, reducing the effect of one of your homes being vacant.
– Buy in quantity to get greater savings.
– Prices in urban regions may rise due to high demand.
– If an apartment presently has a separate kitchen, it is simple to convert it to add an additional bedroom by relocating the kitchen into the living room.
Drawbacks of investing in flats
The following are some of the drawbacks of purchasing apartments as an investment.
– Some have exorbitant ground rents and service fees.
– Financing for specific types of flats and LTVs is more difficult, indicating that lenders see flats as a greater risk.
– More compact living quarters
– Less freedom/opportunity to create value without the permission of the freeholder (no ability to extend, covert a loft, add a conservatory)
– When the flat is in a big block, the unique factor is lower.
– Tenant turnover is higher.
– Unexpectedly high maintenance expenses that may affect your investment returns since freeholders can utilise this as a profit centre.
– Financing for leases of fewer than 80 years is more difficult to come through.
– The value of the apartment will plummet once the lease falls below 70 years, necessitating a payment to the freeholder to prolong the lease, say £10k-£15k on a £100k unit to extend the lease from 70 to 125 years.
– Ground rentals may skyrocket in price over time.
– A “share of the freehold” may provide the best of both worlds, depending on how well others collaborate to keep the property in good repair.
– High-rise apartments have a reduced rate of capital appreciation, and council high-rise buildings are often unmortgageable.
– The danger of a large number of flats in a block causing a short-term oversupply, resulting in vacancies or reduced rental and capital values.
– The home may not be able to be converted into an HMO to decrease voids and improve cashflow.
Benefits of purchasing a home as a buy-to-let investment
– Financing for single-family homes is easier to get by.
– Tenants and purchasers will have more privacy and a sense of spaciousness.
– They will attract longer-term renters, such as families with children, who are more inclined to maintain the home themselves and will not relocate after 6-12 months.
– Greater capital growth possibilities
– They have a higher land size value, providing you more options to develop, convert, or expand to increase the value of the property so you may sell it or refinance it.
– A home will always appeal to a broader range of purchasers, including first-time buyers, investors, and young families.
– There are no excessive service fees or problems with ‘common areas’ that aren’t kept up to date.
– The ability to purchase the property at market value, convert it into numerous apartments, establish leases, and sell/remortgage it, or a combination of the two.
Drawbacks of investing in houses
– Typically higher start-up and investment expenses
– A garden that you may be responsible for maintaining
– Costs of stamp duty and interest are higher.
– If there are children in the family, there will be more wear and tear.
– If a home is vacant, it is more likely to be vandalized/the boiler and pipes taken.
– Because there is more square footage to maintain, there may be more regular maintenance and repair costs.
– The cashflow may be reduced as a result of the decreased yield.
As you can see, there are distinct benefits and drawbacks to purchasing both as investment properties.
So, how can you know which kind of investment property is best for you?
There is no such thing as a “correct” response.
Instead of asking, “What property will deliver on my goals and return the greatest return on my investment?” investors could ask, “What property will deliver on my objectives and return the highest return on my investment?”
What is obvious is that, regardless of your choice, both homes and flats will most likely prove to be smart investments if bought with a high enough return and at the appropriate price. No matter what you choose, you may want to read our article detailing how to reduce risk in property investment.
Contact F&M Finance today for help funding your next property venture.