Investomind

Flats vs House Investment

Advantages of buying flats as buy-to-let investment

  • Generally lower entry purchase price than comparable houses
  • Traditionally higher cash on cash returns and yields (not always)
  • Lifestyle trends may mean renting flats become more popular thereby reducing voids as young people and people without children often like flats
  • Cost of maintaining the building is shared & the freeholder (or the managing agent) will typically organise the work
  • Short leases, absent freeholder, can all make the investment an attractive proposition if you work on wrestling the freehold from the owner by getting others in the block to join with you, enfranchise and buy the freehold
  • Buying flats with management companies that have gone bust can be cheap as they are often un-mortgagble, fix the problem and the value increases
  • The cheaper nature of buying flats means its easier to buy a large number to build up your portfolio
  • Strong demand in metro areas can cause prices to soar
  • Easy to convert a flat to add an extra bedroom if flat currently has a separate kitchen by moving kitchen into living room

Disadvantages of buying a flat as buy-to-let investment

Below are some disadvantages of buying flats as investments.

  • Some have High ground rent and service charges
  • Harder to qualify for financing on a certain type of flats and LTVs meaning lenders see flats as higher risk
  • Smaller living spaces
  • Less opportunity/freedom to add value without consent of the freeholder (no ability to extend, convert a loft, add a conservatory)
  • Lower unique factor when the flat is situated in a large block
  • Higher turnover of tenants
  • Hidden high maintenance costs you didn’t perceive or anticipate that could effect your investment returns as freeholders can use this as a profit centre.
  • Harder to obtain finance on leases less than 80 years
  • Value of the flat will drop quite a lot once the lease goes below 70 years, so a payment will need to be made to the freeholder to extend, say £10k-£15k on a £100k flat to take lease from 70 to 125 years
  • Ground rents can increase a lot over time
  • ”Share of the freehold” can give the best or worst of both worlds depending how well others work together to maintain the property
  • High rise flats attract slower capital growth, council high rise blocks are often nearly unmortageable.
  • Concentration risk of lots of flats in a block can create a short term oversupply meaning voids or lower rental and capital values.
  • May not be able to convert the property into a HMO to reduce voids and increase cashflow

Advantages of buying a house as buy-to-let investment

  • Finance for single family units is more readily available
  • More privacy and feeling of space for tenants and buyers
  • They will attract longer term tenants such as families with kids who won’t uproot after 6-12 months and are more likely to maintain the property themselves
  • More potential for capital growth
  • They have a larger land size value giving you flexibility to develop, convert or extend to add value to flip or refinance
  • A house will always appeal to a larger cross-section of buyers such as first time buyers, investors and young families
  • No high service charges or issues with ‘common areas’ not being maintained
  • Ability to buy the property at market value, convert into multiple flats, create leases and either sell/remortgage or a mixture of both
  • Houses are generally freehold (you own the land). You don’t need to pay service charge or ground rent which can take up a large amount. This will give better cash flow.
  • Ability to add value by adding a conservatory, do a loft conversion, convert garden into garage/office and flip or refinance to withdraw some extra cash.
  • There is an oversupply of flats and less houses are being built, means houses will continue to be attractive.
  • Mortgage products are more favourable to houses than flats as lenders also see houses as safer investment.
  • Flats are more popular amongst first time buyers / amateur investors. Houses are supported by more sophisticated investors and family buyers which has more stability in the market.

Disadvantages of buying a house as buy-to-let investment

  • Typically higher investment and start up costs
  • A Garden you may need to maintain
  • Higher stamp duty & interest costs
  • More wear and tear if families have children
  • A house is more likely to be vandalised/boiler and pipes stolen if empty
  • Potential for more frequent maintenance and repair bills as there’s more square footage to maintain
  • Because of the lower yield the cashflow may be lower

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