Houses or Flats as Property Investments: Which One Wins the Battle of the Best?

When considering houses or flats for investment, the question of which is better often arises. With the UK property market being as unpredictable as it is, it can be hard to decide which option is the best way to invest your money. In this blog post, we'll look at the pros and cons of both houses and flats as investments, so that you can make an informed decision on which is the better option for your needs.  We will also take a look at some of the few misconceptions you might hear people claim about flats and houses.

The Benefits and Drawbacks of Investing in Houses

Investing in houses can be a lucrative venture, but it also comes with its fair share of pros and cons. Let's explore the benefits and drawbacks of investing in houses first.  One main reason, certainly in England, why many investors claim to prefer houses over flats is the freehold versus leasehold situation.  The majority of houses (not all) in England are freehold, this means that the owner owns the land on which the house and garden/land sit, so many see this as a huge positive when it comes to control and autonomy. (We are not going to go deep into the freehold versus leasehold arguement, aside from the house/flat issues, but we will cover them both, as many leasehold properties in England are flats.)As a homeowner/freeholder, you have the freedom to make changes and improvements to the property, allowing you to increase its value and appeal. This can include renovations, landscaping, or even adding extra bedrooms. 

However, there are also some drawbacks to investing in houses. Houses generally require more maintenance and upkeep compared to flats. From lawn care to roof repairs, the costs of maintaining a house can be higher.  As the owner/freeholder you are responsible for paying for the maintenance and up keep of your property and so the costs and expenditure can mount up, though many prefer this ‘control’, as they are in charge of what they spend and when.

Additionally, houses may have a longer vacancy period compared to flats, as they may take longer to find tenants or buyers.

One of the major advantages of investing in houses is the potential for higher returns if you look at standard buy-to-let rents and long term tenants. Additionally, houses often provide more living space, which can attract higher-paying tenants or fetch higher rental prices, especially after Covid, people look for gardens for their families.

Many investors have looked at ways of increasing the income they receive from their property, one way is to convert the house into an HMO, or House in Multiple Occupation.  This is where many of the rooms are converted into bedrooms/living spaces, and are classed as such where the property is rented by a minimum of 3 people, not from the same 'household' and will share facilities like the bathroom and the kitchen.  Although HMO’s can produce much higher yields/monthly rents (if fully occupied) than a normal long term AST rent, to comply with the UK safety regulations and property laws, you have to make sure the property meets the HMO criteria, to include such things as fire doors, and mains linked smoke detectors amongst other things.  To convert the property into an HMO can be quite costly. 

Houses in cities also tend to be further away from the centre than flats/apartments, meaning that tenants will have to commute further to amenities and jobs.  This also links to the property cycle where growth (property prices/values) generally starts in the inner city before spreading outwards.

This will also have a bearing on one of the misconceptions we will discuss later in the article.

The Benefits and Drawbacks of Investing in Flats

When it comes to investing in flats, there are again, both benefits and drawbacks to consider. Let's take a closer look at the pros and cons of investing in flats.

One of the major advantages of investing in flats is the potentially lower upfront cost compared to houses. Flats tend to be more affordable, especially in prime locations where house prices can be steep, though this is not always the case, see the misconceptions later on.

In England, you will find that the majority of flats are leasehold.  This means that, although you own the flat/apartment, you do NOT own the land and building that the flat is in (unless you are the ‘freeholder).    This is seen by many as a negative because you will normally have a lease agreement which can be for any period, but normally 125 - 999yrs, and you will also have to pay service charges.  The service charges are payments that are paid to the freeholder, who accrues this money in a ‘pot’ which is normally then used for repairs and maintenance as and when required.  There have been stories in the past about freeholders increasing these service charges until they are ridiculously high, but if you pay service charges then you do have the legal right to ask for a summary showing how the charge is worked out and what it’s spent on.  The freeholder/management company MUST provide any paperwork supporting the summary, such as receipts and it’s a criminal offence if they do not.

Although some might see the lack of ‘control’ as a negative for the most part flats often come with lower maintenance costs as common areas and external repairs are usually managed by the building management or homeowner's association.  Also you, as the ‘leaseholder’ don’t have to worry about external or common area repairs, such as the roof.

Another benefit of investing in flats is the ease of rental. Flats, particularly those in popular areas, tend to have high rental demand, making it easier to find tenants and keep the property occupied. This can lead to a consistent stream of rental income and a quicker return on investment.

We spoke about how houses can be converted to HMO’s, in order to increase the monthly income, well there is a way to increase a flats monthly rental income without the expenditure of converting it to an HMO, Short Term Lets or Serviced Accommodation.  This is where you let the property on a nightly basis rather than to long-term tenants, this has become popular with the rise of Airbnb and Booking.com (OTAs or online travel agents) and as a result of Covid with more people holidaying in the UK.  Some councils are currently looking at ways of regulating short-term lets, which may mean licenses in the future, but the main expenditure for an investor to consider this option would be to change the furniture to suit short-term let flexibility, such as zip-linked beds (for those wanting a twin room), fully equipped kitchen (pots and pans, etc) and personal touches such as pictures, to make it feel ‘homely’. Find out more about How to Decorate your Property for Maximum Occupancy for Short Term Lets in our detailed blog post on the topic. In many cases, this can double or triple the monthly rental income but this is based on the occupancy levels remaining high, and is a higher risk than getting a long-term tenant.

However, one of the main drawbacks is the limited space compared to houses. Flats typically have less living area and storage space, which can limit the type of tenants you attract and the potential rental income. Additionally, there may be restrictions on what changes or improvements you can make to the property, as you as the leaseholder will have to comply with the rules set by the building management or homeowner's association.

Analyzing Market Trends for Houses vs Flats

Analyzing the market trends can help you make an informed decision on which option is the better investment for you.

It's important to note that the market trends for houses and flats can be influenced by factors such as economic conditions, interest rates, and local development projects. It's essential to keep a close eye on these trends to ensure you're making a smart investment decision.

The market trends for both houses and flats are often influenced by factors such as population growth, urbanization, and changes in lifestyle preferences. Understanding these trends can help you identify profitable investment opportunities.

Misconceptions

Let's take a look at a few of the misconceptions out there in relation to not only houses versus flats, but investing in general. 

There is a general misconception that houses gain more capital appreciation than flats, however, if we look at the facts, over the long term, this is not the case, with apartments outperforming houses for growth.  Try Googling it for yourself! For more information on property prices in general, you might want to read our blog ‘The UK Property Market 2023: Beneath the Headlines’ which delves into the history of the property prices and interest rates.

Another misconception is the broad statement that buying off-plan is risky and buying completed properties is more profitable.  Although there are stories of developments not being built, or developers going bust, there are far more positive stories where investors who have purchased ‘off plan’ have paid considerably less than those who bought in the same development upon completion due to prices increasing during the time it took to be built.  This is based on the property market and market trends, briefly mentioned earlier.

You may hear that it is harder to sell a flat as part of your exit strategy, as opposed to a house, but again, this is a misconception and if you own a flat that is tenanted, or has proof of being a solid investment then there are always investors looking for this type of opportunity.

Another statement you may be told is to not consider city centre properties because they are saturated and oversupplied with residential properties.  A big myth! In prime investment hotspots,  such as Manchester there are some who see the large amount of construction as being saturated, but as the population grows at 15 times faster than new homes are being supplied then the demand for city centre property is not expected to wain in the near future. 

Conclusion

So with that all said, is it houses or flats?  Honestly there is no right or wrong, it comes down to YOUR investment goals, your financial situation/budget, and possibly your own character, ie. Can you relinquish control of your investment to a management company, freeholder or block manager?  Do you want the hassle of managing the property? Dealing with tenants?! 

Think about how much control you want over the property and how that aligns with your investment goals.

Also think about the rental demand in the area you're considering, and can you find the solution to your goals within your chosen area or investment strategy or will you have to look further afield or at other investment options?

If you are a first-time investor struggling with the question of houses or flats then it maybe beneficial to speak to an investment consultant, they can discuss what YOU are looking for, and the options open to you.  Our blog post on ‘The Value of Meeting in Person’ talks about why this is important and if you are New to property investment? Avoid these common mistakes!.

Whatever you decide, make sure you do your own due diligence before jumping in feet first.