Are flats a good investment? Or is it better to buy a house? This is an argument that has been raging for years so we will take a look at the advantages and disadvantages of both here. A lot depends on what your exit strategy is with these investments.
Those that side with house investments will tell you that it is better than having to pay service charges and ground rents on flats. There is a control issue here and dealing with the freeholder is seen as a negative.
There is also a belief that flats have to be returned at the end of the lease agreement. This is not true as most freeholders will be willing to extend the lease. Buying a flat is never wasting an asset and this should not be considered as a problem.
The purchase of a flat is seen by others as a better investments as the yields can often be higher due to the lower purchase price. There is less of a maintenance liability as well as all external repairs are the responsibility of the freeholder.
Reasons Why You Should Invest In A House
With a house purchase there is usually more potential for your capital to grow. It is often easier to obtain the necessary financing for houses as well. The land is larger and therefore has more value. You will be able to develop further or convert to create more value.
With a house investment you could also convert it into flats, which provides more income potential from renters or lease purchases. If you keep your house as a single unit you will attract longer tem tenants as families are unlikely to leave in a hurry. It will probably be easier to sell a house too as the demand is higher.
Reasons Why You Shouldn’t Invest In A House
It is assumed that you will be buying the house to rent it here. One of the biggest disadvantages with house investment is the higher costs at the start. This includes higher stamp duty and interest rates on mortgage payments. This could have a real impact on cash flow.
Investing in a house will mean the likelihood of expensive maintenance and repair activities. If your house stands empty for a while then the possibility of break ins and vandalism will be higher. Your house will probably have a garden which means more maintenance work. If you rent your property to a family with children then the wear and tear costs will probably rise.
Reasons Why You Should Invest In A Flat
It is likely that you can find a good flat for less than half (or more) than the cost of investing in a house. Your cash returns and yields are also likely to be higher. The maintenance costs of the building are normally taken care of by the freeholder or at worst these are shared. Because of the lower investment costs, you can build up a portfolio of flats pretty fast.
In metropolitan areas the demand for flats is likely to be high. A flat is often more popular to rent by young people and those that do not have children. There is often more scope for negotiation with flats. Short leases are possible and if the freeholder is absent then it maybe possible to buy them out with the collaboration of others in the block.
Reasons Why You Shouldn’t Invest In A Flat
Some lenders see flats as a higher risk so the raising of finance can be difficult. When you invest in a flat you will have to pay ground rent and possibly service charges and this can be expensive. You are likely to be restricted on conversions and extensions without the freeholder’s permission.
The turnover of tenants in a flat is almost certainly going to be higher than a house. This means that your flat can be empty and not making you any money. A flat is a smaller living space and will not appeal to some renters. If the lease on the flat falls below 70 years then the value of the flat will drop by quite a significant amount. To avoid this you will need to pay the freeholder for an extension and this can be costly.
The truth is that there are advantages and disadvantages to investing in flats or houses. You need to take into consideration the costs at the start and the ongoing maintenance responsibilities.