Updated: Sep 15
There has been a rise in landlords considering investing in more properties. In part this is due to the current stamp duty land tax exemption on properties worth up to £500k. The SDLT holiday ends on 32 March 2021. If you want to add another property or two to your investment portfolio, read on as we discuss the main differences between flats and houses for investment purposes.
The two most common forms of residential housing in the UK are houses and flats.
Houses can be anything from a traditional family dwelling to a large Victorian terrace converted into a series of bedsits.
Flats are a self-contained unit in a larger block, either a converted house or a purpose-built development.
There are pros and cons to each, which is why it’s important to consider every aspect of the purchase before you make a final decision.
Purchasing Houses as Investment Properties
There are a lot of pluses to buying an investment house as opposed to a flat. The following are points to consider during the buying process.
Houses are More Desirable to Affluent Tenants and Families
Houses tend to be popular with families and anyone desiring a garden or outside space. Most houses come with at least some outdoor space, even if it’s only a back yard. Renters with children and pets will usually look for a rental property that has a garden or back yard.
Families also prefer houses because they are usually larger. Most flats are small studios or one/two-bed apartments. It is possible to find larger three-bed flats, but these tend to be high-end properties in cities like London or purpose-built city centre student accommodation.
Houses Usually Have Gardens and Garages
A lot of tenants want properties with gardens and garages. If they have children and / or pets a garden will be essential. Garages are also useful, even if the tenant doesn’t own a car. Most people these days use the garage as a storage area.
Houses Often Have Parking Space
In many towns and cities, parking is difficult, and permits are required. A property with ample off-road parking will be attractive to tenants. Many houses come with driveways or designated parking spaces. Larger properties may have room for two, three, or more vehicles, which is a bonus for large families and tenants with a work vehicle as well as a private car.
Flats may also have a designated parking space, but there is usually only one space per flat.
If you are looking for properties in residential areas or commuter towns and villages, houses are your best bet. Most properties outside of a city centre location are houses rather than flats, with the exception of London. Most London boroughs have a mix of both property types but there tends to be more flats than houses.
Some towns have older properties converted into flats, which often appeal to lower income tenants. If you’re planning to market to families and executive tenants, it’s better to look at houses in residential areas.
Houses Have Freehold Tenure
Houses are usually sold on a freehold basis, i.e. you buy the land the house is built on as well as the house itself. From a conveyancing perspective, the paperwork is relatively simple, and therefore legal costs will be lower.
The advantage of a freehold property is that you are in control of everything. Freehold properties don’t have issues with management companies or short leases, all of which can cause problems with leasehold flats.
Always check the property you’re interested in is freehold rather than leasehold. Whilst houses are usually freehold, in some cities (Sheffield being one example), the local authority owns large tracts of land and houses built on them are leasehold. Check the property listing in detail to find out if this is the case – the tenure will be noted somewhere in the description.
Houses Grow in Value Faster
Houses usually grow in capital value more than flats. This is because flats are more likely to be leasehold, and in time, the lease term diminishes, which makes a flat harder to sell.
The capital gain will depend on what type of house you buy. Terraced houses tend to enjoy better capital gains than larger detached houses because they appeal to first-time buyers, which makes them easier to sell. Data from Zoopla shows that terraced houses have seen the largest value increase in the last five years, and also the last 20 years. Past market gains may not reflect future market gains, but they are certainly a useful indicator.
Houses Have Potential for Expansion and Improvement
There is the potential for expansion and improvement when you buy a house. You could convert the attic to create an extra bedroom, convert the garage to add more living space, build a conservatory, add an extension – the possibilities are endless.
Planning permission is required, of course, but any improvements you make will often add value to the property. For example, if you invest in a rundown property and bring it up to date before advertising it to tenants, not only can you command a higher rent, but you have increased the capital value.
Don’t underestimate the value of space in the current market. A lot of renters are looking for properties with enough space to allow them to work from home. This is likely to be a long-term trend, which ensures rental houses away from crowded towns and cities are going to be more popular with renters.
There are far fewer options with a flat. Aside from installing a new kitchen or bathroom, there is very little you can do. You certainly can’t add more space unless it’s a ground floor flat with a basement ripe for conversion.
Houses Have More Flexibility
Houses are more flexible than flats. Larger houses can be let as one unit, as a house share to multiple tenants, or even sub-divided into bedsits or self-contained units (subject to the necessary planning consents). It also means a rental house has wider appeal, as you can market to multiple types of tenant, from families to students and young professionals. This minimises the risk of voids.
Buy to Let Mortgages
If you need to borrow money to pay for your buy to let investment, bear in mind that many lenders see houses as lower risk compared to flats. Lenders might require a larger Loan to Value (LTV) if you want to invest in a flat. Speak to a mortgage broker if you have any concerns about this when looking for an investment property.
Buying Flats as Investment Properties
If you are thinking of investing in a flat, consider the following points.
Flats are More Desirable in Towns and Cities
One plus in favour of flats is that they are common in city centres. Flats tend to be more popular with renters looking for accommodation close to amenities and workplaces. If you invest in a city centre flat, you won’t be short of applicants. Flats usually appeal to transient and young professional tenants, who are more likely to live in city centres because that’s where the jobs are found.
Flats are Cheaper to Buy
Good quality flats are often less expensive than similar sized houses. If there are several flats for sale in one block, there could be financial incentives to purchase more than one property. Speak to the freeholder or their agent if you are interested in negotiating a discount.
Flats are Flexible Living Spaces
It’s easier to move things around in a flat since all the rooms are on one level. For example, you could move the kitchen into the living room to create an open-plan living space, giving you an extra room to turn into a bedroom or study. There is less scope to do this with a house, although it’s not impossible.
Flats Have Leasehold Tenures
One of the potential issues raised when buying a buy to let flat is that it is likely to be leasehold rather than freehold. Leasehold tenures come with extra responsibilities and costs. You will own the flat but not the building it resides in. Current estimates say there are around 4.2 million leasehold properties in the UK, many of which are in the private rental sector.
When a property is leasehold, the lease diminishes over time. Whilst it may be possible to extend the lease when you buy the flat, this will depend on the landowner. It might also be expensive to extend the lease. Most mortgage companies won’t lend on a property with a lease less than 80 years, so you’re limited to cash buyers only. This might not be an issue if you buy the property with a 90-year lease at the outset, but after 11 years the lease drops to 79 years. When the time comes to sell, you’ll see a huge drop in value and the pool of potential buyers will shrink massively.
Beware of restrictive covenants if you buy a flat. Older houses often have covenants, but they tend to be along the lines of “this house must not be used as a public house or tannery”. Flats are more likely to have covenants that say the flat can’t be sub-let or residents can’t do X, Y or Z.
Covenants are something your solicitor can look for during the conveyancing process.
Maintenance and Repairs
Landlords are required to maintain their rental properties. As the proud owner of a buy to let house, all maintenance responsibilities fall on your shoulders. You’ll also have to maintain the garden, if there is one. With houses more issues can arise. E.G. a tree root grows into an underground wastewater pipe within the boundary of the property, that’s your responsibility.
Flats also require maintenance, but you also have to maintain communal areas. Entrance halls, gardens, and even the roof will all need maintenance at some point. If work needs doing to the fabric of the building, you might end up hit with a large and unexpected bill (more on this below).
Ground Rent and Annual Service Charges
The freeholder of leasehold properties may charge ground rent and an annual service charge. These charges cover maintenance and repairs of the communal areas. This will eat into your cash flow and profit margins.
Pay close attention to the annual service charge and ground rent.
Is it fixed or can it be increased at predetermined intervals?
Are there limits on the increases?
What does the service charge cover?
Is ground rent included in the service charge, or is this an extra cost?
Flat owners in smaller blocks may be asked to pay money into a fund that covers maintenance work on the building. Some maintenance funds are poorly managed and there is not enough money in the account to pay for major works. This is a problem if more expensive works need to be carried out, such as roof repairs. The problems might only affect the owners of flats directly under the roof, so those living on the ground floor might refuse to pay for something that doesn’t affect them.
It’s important to check the status of any management company and their accounts. This is something your solicitor can look into if you decide to buy a leasehold flat. Have there been major works carried out? Is the fund healthy or sinking? Find out if there are any major works planned so you’re not hit with a hefty bill shortly after completing on the purchase.
Cladding works in the aftermath of the Grenfell Tower tragedy are a good example of the huge bills flat owners can face. Many owners have belatedly discovered that they have to cover the cost of replacing flammable cladding on their high-rise blocks.
“The Secretary of State has made clear that building owners should do all they can to protect leaseholders from costs relating to interim measures and cladding remediation – either funding it themselves or looking at alternative routes such as insurance claims, warranties or legal action.”
Unfortunately, many building owners are passing on the costs to their leaseholders, especially if they feel they were not responsible for commissioning the original work. Some building owners may not be able to afford the works required, and therefore have no choice but to pass on the costs to individual leaseholders.
Liability for such works is a legal minefield and it is important to seek legal advice before buying a leasehold flat in a high-rise block affected by cladding issues.
Permission May be Needed for Flat Improvements
Unless the property is listed, landlords are free to do what they like to a house, subject to planning permission, of course. It can be more difficult getting work done when the property is leasehold. You may have to seek permission from the freeholder, which could take time if they are not easily contactable. You may also need to consult with your neighbours, which again might be problematic.
Potential Issues with Neighbours
Don’t underestimate the potential issues close neighbours can cause if you own a flat. If you turn the flat into a short term let for instance neighbours may be disturbed by frequent comings and goings of new short term tenants. If you have noisy or inconsiderate neighbours or if your tenants are noisy and inconsiderate this can cause problems for everyone involved.
If you do intend to buy a leasehold property, look for a solicitor experienced in this area. Leaseholds are complex and you need to know there are no restrictive covenants and you are not signing up for a service charge that might massively increase over time.