Xem thêm

Buy to Let Houses vs. Flats - Making the Best Investment Choice for Landlords

Image: Collection of red and white house on a red background The real estate market has seen a surge in landlord property investments, particularly during the pandemic. With the SDLT exemption on properties up to...

Collection of red and white house on a red background Image: Collection of red and white house on a red background

The real estate market has seen a surge in landlord property investments, particularly during the pandemic. With the SDLT exemption on properties up to £500k, many investors took advantage of the opportunity to expand their property portfolios. One question that frequently arises is whether buying a house or a flat is the better investment choice for landlords. In this article, we will explore this question and help you make an informed decision.

Investing in Rental Properties

Investing in rental properties remains a popular strategy, and with careful planning, it can yield profitable returns. Most beginners in property investment opt for a buy-to-let strategy. The two most common types of buy-to-let properties are flats and houses. In this article, we will examine the pros and cons of each, helping you determine which option is best suited for your investment goals.

Flat Vs House Definition for Investment Purposes

The UK housing market offers two common types of residential properties: houses and flats.

  • Houses range from traditional family dwellings to large Victorian terraces converted into bedsits.
  • Flats are self-contained units within larger blocks, either converted houses or purpose-built developments.

To make an informed decision, it is crucial to consider the advantages and disadvantages of buying a house or a flat for buy-to-let purposes.

Purchasing Houses as Investment Properties

Buying an investment house comes with several benefits that are not typically associated with flats. Although houses tend to be more expensive, they offer unique advantages for landlords. Here are some key points to consider:

Houses are More Desirable to Affluent Tenants and Families

Families and tenants seeking outdoor spaces often prefer houses. Houses usually come with a garden or back yard, which is highly appealing to renters with children and pets. Additionally, houses offer more space compared to most flats, which are often small studios or one/two-bedroom apartments. While larger three-bedroom flats do exist, they are generally high-end properties in cities like London or purpose-built student accommodations.

Houses Usually Have Gardens and Garages

Properties with gardens and garages are highly sought after by tenants, particularly those with children or pets. Gardens provide essential outdoor space, while garages are often used for storage purposes.

Houses Often Have Parking Space

Parking can be a challenge in many towns and cities, with permits often required. Houses with ample off-road parking are attractive to tenants, especially those with multiple vehicles or large families. While some flats may offer designated parking spaces, they usually only provide one space per flat.

Houses Tend to be in Non-city Locations

If you are looking for investment properties in residential areas or commuter towns and villages, houses are the way to go. Outside of city centers, most properties are houses, except in London, where flats are more prevalent. Older properties in some towns have been converted into flats, which may appeal to lower-income tenants. However, for families and executive tenants, houses in residential areas are usually the preferred option.

Houses Have Freehold Tenure

Houses are typically sold on a freehold basis, meaning you own the land on which the house is built. This simplifies the conveyancing process and reduces legal costs. Freehold properties offer more control to landlords, without the potential issues associated with management companies or short leases often seen with leasehold flats. Always double-check the property details to ensure it is indeed freehold, as some cities may have leasehold houses on land owned by the local authority.

Houses Grow in Value Faster

Houses generally experience greater capital value growth compared to flats. Flats often come with leaseholds, and as the lease term diminishes over time, selling a flat can become more challenging. The type of house you invest in will determine the capital gain. Terraced houses, for example, have shown significant value increases over the past five and twenty years. While past gains don't guarantee future returns, they can serve as a useful indicator.

Houses Have Potential for Expansion and Improvement

When you buy a house, you have the opportunity to expand and improve the property. Converting the attic, garage, or adding extensions can increase the property's value. In today's market, having enough space for tenants to work from home is in high demand, making houses away from crowded towns and cities more appealing. On the other hand, buy-to-let flats offer limited options for expansion and improvement, apart from upgrading the kitchen or bathroom.

Houses Have More Flexibility

Compared to flats, houses offer greater flexibility for landlords. Larger houses can be let as one unit, shared among multiple tenants, or even divided into bedsits or self-contained units with the necessary planning consents. This versatility widens the tenant pool, reducing the risk of prolonged vacancies.

Buy to Let Mortgages on Houses

If you require a mortgage for your buy-to-let investment, it's worth noting that many lenders perceive houses as lower risk than flats. This may result in lenders requiring a larger Loan to Value (LTV) for flats. Speak to a mortgage broker to address any concerns when searching for an investment property.

Buying Flats as Investment Properties

Flats can be attractive investment options for several reasons. They are often less expensive than houses and easier to manage between tenants. Here are some key points to consider:

Flats are More Desirable in Towns and Cities

One advantage of buy-to-let flats is their popularity in city centers. Flats are preferred by renters seeking accommodation close to amenities and workplaces. Investing in a city center flat ensures a consistent influx of applicants, especially among transient and young professional tenants who tend to work in the city.

Flats are Cheaper to Buy

Generally, flats are more affordable than houses of similar size. If multiple buy-to-let flats are available in a single block, there may even be financial incentives to purchase multiple properties. Engage with the freeholder or their agent to inquire about potential discounts.

Flats are Flexible Living Spaces

Compared to houses, flats offer greater flexibility in terms of rearranging rooms. For example, you can transform the kitchen into an open-plan living space, providing an additional room that can be converted into a bedroom or study. While houses offer some degree of flexibility, flats are generally more adaptable due to their layout.

Flats Have Leasehold Tenures

One potential issue with buy-to-let flats is their leasehold tenure. Leasehold properties come with additional responsibilities and costs. As the owner of a leasehold flat, you own the flat itself but not the building it is part of. Over time, the lease diminishes, and extending it may depend on the landowner's willingness and could be costly. Mortgage companies typically require a lease of at least 80 years, limiting potential buyers to cash buyers if the lease falls below that threshold. Ensure you consider these factors when purchasing a leasehold flat.

Restrictive Covenants for Flats

Flats are more likely to have restrictive covenants in place compared to houses, potentially limiting subletting and other activities. During the conveyancing process, your solicitor can investigate the presence of restrictive covenants, ensuring a smooth transaction.

Maintenance and Repairs in Flats

Maintenance of rental properties is a landlord's responsibility. With houses, maintenance typically involves the property itself and the garden. In contrast, flats necessitate maintenance not only within the unit but also in communal areas such as entrance halls, gardens, and roofs. Major works on the building can result in unexpected expenses, making it important to assess the management company's accounts and potential future costs before purchasing a leasehold flat.

Ground Rent and Annual Service Charges in Flats

Leasehold properties often incur ground rent and annual service charges, covering the maintenance and repairs of communal areas. These costs can affect your cash flow and profit margins. Pay close attention to the terms and limits of these charges, ensuring they align with your investment plans. Some property owners have experienced substantial increases in ground rent and leasehold charges, making it crucial to thoroughly understand all costs associated with a leasehold property.

Unexpected Bills for Flat Owners

Flat owners can face substantial unexpected bills, such as cladding works in the aftermath of the Grenfell Tower tragedy. Failure to cover these bills often leads to landlords passing on the costs to leaseholders. When considering a leasehold flat in a high-rise block affected by cladding issues, seek legal advice to fully understand your liabilities.

Permission May be Needed for Flat Improvements

Unlike houses, where landlords have relative freedom to make alterations, leasehold flats often require permission from the freeholder. Obtaining consent might be time-consuming if the freeholder is difficult to reach. In some cases, consulting with neighbors may also be necessary.

Potential Issues with Neighbors in Flats

Owning a flat entails potential issues with close neighbors. For instance, leasing your flat as a short-term rental might disturb neighbors due to frequent turnover of tenants. Noisy or inconsiderate neighbors, as well as noisy tenants, can cause problems for all parties involved. When considering a leasehold property, consult with an experienced solicitor to ensure there are no restrictive covenants or significant service charge increases in the future.

Is Buying a Flat a Good Investment?

With strong demand in the rental market, flats are excellent investment options, especially in areas where rental properties are in short supply. Flats located in city centers, which attract professional tenants, tend to be particularly desirable. To make a wise investment, find a flat with a reputable leaseholder, reasonable ground rents, service charges, and efficient building management. As long as the property is well-maintained and has a leasehold of more than 80 years, selling it and seeing capital gains should not pose any significant challenges.

Flat or House - Which is a Better Investment?

Both flats and houses offer advantages and disadvantages for landlords. It is crucial to market your property to the right types of tenants based on local demand. Consult with letting agents, scan online ads, and talk to tenants to understand their preferences. Before exploring investment properties, consider the target demographic and location. Desirable areas often attract tenants, making it easier to find occupants for your property. Lastly, engage an experienced conveyancing solicitor for leasehold properties, as leaseholds can be complex, and professional advice ensures a smooth and secure transaction.

Are you considering flats or houses for your investment portfolio? Share your thoughts and experiences with other landlords on our Facebook or Twitter pages. We'd love to hear from you!

1