Flats vs Houses
When you start out looking for rental properties to build a portfolio, flats often appear an obvious choice…they are small, compact little units which we can easily picture having a happy tenant in them. However, as with everything these days, it’s not necessarily that simple. These are my top 5 pointers for deciding between flats and houses…
1. Freehold vs Leasehold
The really BIG difference between your average house and your average flat, is who owns the freehold. Now, if you are sat there secretly wondering what on earth a freehold or a leasehold is…don’t worry, I was completely clueless about freeholds and leaseholds when I first decided to start investing. Here’s a quick definition with as little jargon as possible…
A freehold title is the simplest form of property ownership. If you own the freehold, you own the property and the land it is built on. However, if you only own the leasehold of a property, you don’t own the land which the property stands on. In fact, you could argue that you don’t technically own the property at all…you are essentially leasing the property from the freeholder (who can also be called the landlord…confusing, I know!) and you may or may not need to pay ground rent to the freeholder for the duration of that lease.
For example, if you buy a leasehold property with a 999 year lease, you have the right to own that property for 999 years and then, if you don’t extend the lease, the ownership would go back to the freeholder. That said, 999 years is a long time, so people generally treat this as being as good as owning the freehold. But, if the lease expires in 85 years or less, that could be much more of a problem. If your lease is expiring soon and you still want to own the property, you need to extend the lease with the freeholder. Unfortunately, there is no rule as to how much the freeholder can charge for that privilege. The government is looking into making this process fairer and cheaper for the leaseholder, but for now it’s still a case of negotiation!
The even more sneaky part about leasehold properties is that the freeholder can determine certain conditions within the lease. This gives them the power to determine how much ground rent you need to pay each year…some are very reasonable (my latest property purchase has a lease from the 1880's with a yearly ground rent written in shillings and pence!), some are much less so, so you need to check the lease carefully before purchasing a leasehold property.
Now we’ve got to grips with freehold and leasehold, we can start to have a look at how this affects flats vs houses…
Property law in England and Wales dictates that flats are leasehold. Sometimes, if you are buying the ground floor flat or the whole block, you will be able to buy the freehold as well. However, often the developer creates separate leasehold titles for each flat, but keeps the freehold or sells it off separately.
Houses can be leasehold as well, especially in areas where historically rows and row of terrace houses were all built by factory owners to house their workers. The good news is that as of July 2019, new build houses in the UK have to be sold as freehold by law (with the exception of shared ownership properties) and all new long-term leases, for flats or houses, have to have ground rent set at £0. Amazing! This means that over time, there should be fewer and fewer leasehold properties about and far fewer people will get caught out by sly lease terms exposing them to ever increasing costs.
But for now, it is SO important to look into the terms of the lease for any flat or leasehold house… How long is left on the lease before it expires? What is the yearly ground rent? Have they snuck in a clause to automatically increase the ground rent every so often?
YOU as the owner of a flat or house are responsible for paying ground rent on your leasehold property, not your tenant. So, you need to be really clear on the details. A scary example is that some ground rents double every 5 years which can make selling the property really difficult and ultimately may reduce your property's value.
2. Purchase Price and Supply
Generally, a flat will have a lower purchase price relative to the number of bedrooms than a house of a similar condition in the same area. This can be a big plus if you are trying to find the finance to make a purchase. In contrast, there often isn’t as big a difference between flats and houses in the rent you could expect to achieve, meaning flats do have the potential for slightly higher returns.
There’s also been quite a boom in building blocks of flats or houses being converted into flats over the last 25 years, meaning most popular rental areas have plenty of flats available. However, this abundance of supply also contributes to keeping the values of flats relatively low….good for buyers, not so much for sellers.
3. Refurbishments and Adding Value
If you like the idea of getting your money to work as hard as possible for you, then a great strategy is to look at adding value to a property. You put the money in, do the work and then re-mortgage or sell the property so that you can draw your money back out of the project and invest it in the next one. To do this, you need to consider what the property will be worth after your refurbishment. By the very nature of flats having smaller floor areas than houses, there is often less scope for adding value by re-configuring walls to add a bedroom or an en-suite for example.
Having said that, it is still possible to snap up a run down flat, reconfigure a wall or two, upgrade the kitchen and bathroom… and voila, you’ve added a good chunk of value. You just might have to look a bit harder to find these gems!
The other, often overlooked, area of a property where you can add value is in outside spaces…read gardens. There is a rule of thumb among landscapers that for every £1000 you spend improving a garden area, you add about £3-5000 to the property value. That’s a HUGE return on investment! If you only ever buy flats then you might not be able to take advantage of this rule… I mean, how nice can you make a 3ft wide balcony?!
4. Rental Voids
Whilst a well presented flat can be just as easy to rent out as a well presented house, tenants often view living in a flat as a relatively temporary measure. It’s hard to say exactly why, but I’m sure you know someone who has moved to a new area with the attitude of I’m just going to rent a flat while I get settled/sorted/work out where I want to be.
Personally, I’d say it has A LOT to do with garden space…especially as people get to an age where they start considering kids…the thought of being cooped up in a house with young children and not being able to send them outside running in the garden?!? No thank you!!
In my experience, people tend to get more settled in houses and mentally consider them as longer-term homes. Obviously, this isn’t a hard and fast rule by any stretch and if you’re buying in an inner city then your ideal tenant might well be much more career than family focused, but it is worth keeping in mind.
The bottom line is that flats tend to have a slightly higher turnover of tenants than houses and consequently, more void periods. Voids = loss in profits, simple. So, unfortunately this can wipe out any benefit of slightly higher rental returns.
5. Maintenance and Bills
Environmentally, flats make a lot of sense. They tend to have less external walls and only one in the block will have a roof to lose heat from. Good news if you are the one paying the bills, but in general bills are covered by tenants so this doesn’t usually have a big impact on profitability for rental landlords.
Sometimes, the lease was set up such a long time ago that the Land Registry doesn’t have details of the freeholder or the freehold title for the property. When this happens, they issue something called a “Good Leasehold Title”. It sounds good, but it isn’t great…it basically means you often need to pay for extra insurance in case the freeholder pops up out of nowhere and demands the ground rent for the past 6 years. If the Land Registry does have all the details they need on the freeholder, then the property gets what’s known as an “Absolute Leasehold Title” which is much better in the eyes of solicitors and mortgage lenders.
The biggest maintenance costs for properties are often from failures in their roofs or from damp issues. For flats, these repairs will usually be the responsibility of the freeholder…but don’t be fooled into thinking they won’t try to cover this cost through service charges…
Service charge is the payment from the leaseholder to the freeholder (or landlord) for all of the services they provide. The idea is that the service charge covers repairs, maintenance, insurance (yep…you might not have to buy the buildings insurance yourself, but you still have to pay towards it!), lifts, upkeep of common areas….you name it, they’ll charge for it. And often, they charge in advance to create a “sinking” fund. Service charges are THE main point of dispute with flats, mainly because the costs can change every year and often seem unreasonably high…leading to tribunals and lots of headaches.
As the owner of a flat you might have less maintenance to organise yourself, but you also have less control over who does the maintenance or repairs on the building and how much you inevitably end up paying for it!
Ultimately, whether you're looking for flats or houses, the devil is in the detail - check the legals, check the numbers, check the demand. There’s good and bad deals lurking out there for each, you just need to know what to look out for to make sure you get what YOU want out of your property.
Do you fancy adding value, recycling your money and building a portfolio? Houses might offer more potential than flats.
Or, would you like to rent through corporate company lets and maximise your rental returns? Flats could work really well for you.
Honestly, there is no right answer, it’s all about what floats your boat and will get you racing towards your personal property goals. Hang on…you haven’t set clear goals for your property investment journey?! Don't panic, jump over to my blog on The First 5 Steps to Start Your Property Investment Business and get clear on your goals so you can decide Flats vs Houses for yourself.