When starting out in property investment, newbie landlords are confronted by a lot of choices, which can often be overwhelming.
One such choice is whether to buy a house or a flat.
Flats are often perceived by newbies to be a “safe bet” or lower risk.
However, the answer to this evergreen question should be based on the landlord’s individual circumstances and goals along with an understanding of the differences between leasehold and freehold and the opportunities that houses offer over flats.
We generally recommend that landlords focus on cash flow first and foremost. This assists them remaining in the game long enough to enjoy capital appreciation.
Landlords should regard property investment as long term – 20 to 25 years – and, bearing in mind that a lot can happen during that timespan – it’s important to buy wisely and ensure you have a sustainable investment that is going to assist you in achieving your goals.
The issue with flats from a landlord perspective are as follows:
1. Being leasehold, they come with ground rent and service charges, which can be quite significant, and this eats into cash flow.
2. They often attract more transient tenants so tenant turn-over is greater.
3. New build flats are often sold off-plan to investors, creating over-saturation in an area.
4. Unlike freehold houses, flats cannot be developed to create more space such as an extension or a loft conversion.
5. Smaller leasehold properties capital appreciate more slowly.
New research suggests that smaller than average properties and “micro” flats do not fare well in the capital appreciation stakes.
Consumer group Which? has focussed on properties smaller than 37 square meters and says almost 8,000 of these were built in 2016.
Which? says micro-apartments of this kind have been built in London, Leicester, Liverpool, Cambridge and Bristol in recent years.
But it insists that buyers, including buy to let investors, should be aware that micro-homes of this kind don’t necessarily appreciate in value like their larger counterparts, while some mortgage lenders won’t lend on them at all.
Which? compared the average price of different sized properties sold in 2016 with those sold between 2013 and 2015 to measure the price growth of different-sized homes.
“Our analysis showed properties with floorspace of between 50 and 120 sqm had the best price growth in the period. However, homes smaller than the national minimum space standards did not perform as well; price growth for properties smaller than 37 sqm was 6.9 per cent compared with 8.7 per cent for homes larger. This is despite almost two-thirds of these smaller properties being located in London and the South East, which have seen massive rises in house prices in recent years” says Which?.
6. Mortgage products tend to be more favourable for houses than leasehold flats, and some lenders will not lend on small or studio flats, or developments where there are a lot of investors buying units.
7. Due to pressure on the government to build more homes, there are far more flats being built than houses, particularly in city centres.
8. Some flat leases come with restrictions on sub-letting and the landlord may have to pay an annual fee for this.
As always, due diligence is key and the first thing to do is research tenant demand. If you have high tenant demand in an area then that is the most important box to tick. Once you have ascertained the level of demand, you can then consider how you, as a landlord, are going to create some supply.
As a local letting and estate agent in Northampton I have a lot of knowledge of the area and I would be more than happy to give my opinions on the best type of property to buy for investment – whether that be a house or a flat to you if you are a newbie landlord.
We also have our “Investor List” which is a list of properties for sale that we believe are suited to investment.
It is our aim to support our landlords throughout their property ownership lifecycle and ensure they survive and prosper, and this can start in the pre-acquisition stage so feel free to get in touch with me, you can call me at the office on 01604 607080, drop me an email firstname.lastname@example.org or why not pop by the office on the Wellingborough Road in Northampton.