Investors looking to buy rental properties often wonder whether houses or flats make better buy to let investments. As an experienced landlord who has owned both, I can share valuable insights on this topic. In this article, we'll explore the pros and cons of houses and flats from a landlord's perspective, helping you make an informed decision.
Do Flats Make Good Buy to Let Investments?
One of the important distinctions between flats and houses is that flats share a building with one or more other flats, while houses don't, although they may share party walls. This has significant implications and risks for landlords.
1. What Does Leasehold Mean?
For flats and some houses, the building and the land it sits on (the freehold) are owned by someone else, known as the freeholder. Each flat owner, or leaseholder, enters into a lease with the freeholder to own the flat for a fixed period of time. The length of the lease decreases year by year until it eventually runs out. This means that a leasehold property's value diminishes as the lease approaches expiration.
Leasehold properties come with additional costs such as ground rent and service charges for repairs and maintenance. It's also important to note that obtaining a mortgage for a property with less than 80 years remaining on the lease can be challenging.
2. Potential Problems with Leasehold Properties
a. Onerous Ground Rent Clauses
Some older leases include onerous ground rent clauses that double every few years, leading to exponential increases in ground rent obligations. These clauses are highly unpopular with lenders and can make it difficult to sell a property. However, new legislation has been introduced to ban such clauses in new leases.
b. Restrictions in Leases
Leases often have restrictions that limit a leaseholder's ability to make structural alterations to the building, such as loft conversions or extensions. This can make it harder to add value to the property, although some conversions may have specific allowances for certain types of alterations.
c. Limited Control Over Increasing Service Charges
Service charges and other maintenance fees for leasehold properties can be unpredictable and subject to sudden increases. Landlords have limited control over the amount allocated to the sinking fund for future repairs. However, ongoing leasehold reform efforts aim to improve transparency and control in managing service charges.
d. Cladding
Leasehold flats in high-rise blocks may be subject to the controversy surrounding the remediation of flammable cladding. It's advisable to prioritize low-rise blocks without cladding to reduce risk.
e. Leasehold Reform
Leasehold reform legislation is in progress to increase leaseholders' rights and make it easier and cheaper to buy the freehold of leasehold houses.
3. The Advantages of Leasehold Properties
Leasehold properties relieve landlords of certain responsibilities, such as repairing and maintaining the shared areas of the building or managing a shared garden. However, the effectiveness of the management company overseeing these responsibilities plays a crucial role in the overall experience.
Are Houses Good Buy to Let Investments?
Research indicates that a significant percentage of private renters prefer houses. Access to outdoor space has become a priority for renters following the Covid-19 lockdowns. Let's explore the benefits and considerations of investing in houses.
1. Is the House Freehold?
Houses typically come with the freehold, which means that the landlord is responsible for repairs, maintenance, and building insurance. However, some new developments have leasehold houses, where the freehold is retained by the developer. It's important to be cautious of ground rent and service charges in such cases.
2. Outdoor Space
Houses often come with outdoor space, which has become highly desirable among renters. Access to a low-maintenance garden can attract tenants and potentially allow for higher rent charges. Be sure to clearly stipulate the tenant's responsibility for maintaining the garden in the tenancy agreement.
3. Higher Ongoing Maintenance Expenses
Owning a freehold house entails more responsibilities for repairs and maintenance compared to leasehold flats. Landlords need to budget for regular upkeep of the building, including the roof, windows, and guttering. However, the advantage is having more control over when and how to maintain the property.
Final Thoughts
When choosing between houses and flats for buy to let investments, various factors should be considered. Flats tend to be more affordable upfront and are popular in cities and large towns. On the other hand, houses appeal to a wide range of tenants, including families, couples, and those seeking outdoor space.
Ultimately, your decision should depend on your budget, target market, investment horizon, and personal preferences. For me, the advantages of houses outweigh the complexities of leasehold properties. Having learned from my own experience, I now prefer houses for buy to let investments.
You may also find the following resources helpful:
- Landlord essentials: Tips on what you need for your Buy to Let
- Practical guide to the Leasehold and Freehold Reform Bill
- How to choose the best location for your next buy to let
- How to self-manage your buy to let
- Are limited companies best for landlords?
- How to speed up conveyancing
- What all new landlords need to know