Flats vs houses - what is the better option?

Flats are a great investment to start with and in many aspects the easier option to have in your portfolio. In this post I will outline the pros and cons of flats versus houses for your investment strategy. You will find though that a mix between these two property types might just be the best approach.

First off, let’s look at the advantages of buying flats.

1.       Purchase cost

Let’s assume you want to start out building a property portfolio and you have saved up for your first deposit. You’ve started to look at Rightmove listings and see what you can afford to buy. You’ll find that in general a two-bedroom flat tends to be cheaper than a two-bedroom house. This is a bit of a generalisation as there will be flats that are more expensive than houses that offer the same number of bedrooms but in general comparable flats tend to be cheaper. The reason of course is that with a flat you buy ‘less’ property, you essentially buy part of a building and its plot rather than the whole property. So, from a purchase cost aspect, flats tend to be the more starter-friendly option.

2.       Maintenance and repairs

In general, flats tend to come with fewer maintenance issues. That’s simply the case because many areas of a property are common and therefore not the individual property owner’s responsibility. All potential issues with the roof, the fabric of the building, the common parts such as entrances and stairwells as well as the garden, if there is one, fall under a common responsibility and are not your concern. On the flip side, damage can be caused by other residents. You could for example be of the receiving end of a leaking pipe from the property above you. And whilst you don’t have to deal with a lot of the common repairs and maintenance issues you will most likely be responsible for financial contributions for these common items. For many properties there will be an appointed factor who organises common repairs and a fee will be paid to them, first for their work and then, secondly for the instructed contractors who have carried out the maintenance. Examples here are clearing of gutters, roof repairs, garden upkeep and redecoration of common stairwells.

3.       Yields and profitability

Flats usually provide a better rental yield, especially in city center locations where land is in high demand. It can be tricky though to make generalisations in this regard as there is of course such a variety of purchase prices, sizes, locations and standards of properties. Having said that, if you were to compare some fairly similar properties and looked at it purely from a yield perspective, then the flat would usually be the better option.

Let’s look at an example:

Flat purchase price: £150,000
Rent: £750 pcm
Gross yield: 6.0%

House purchase £220,000
Rent: £950
Gross yield: 5.2%

We have now only looked at gross yields and have not taken into account any costs such as management fees, factor charges and maintenance. Depending on the actual deal you can get and all costs involved my recommendation would be to compare net yields on a property to property basis and not make your investment decision with the notion that flats always provide a better yield.

4.       Purchase price

Flats are normally cheaper to buy, simply because you buy less ground and ‘less property’. And in this regard flats are often the more investor-friendly option. You need less capital to get started, e.g. £30,000 for a flat deposit vs. £50,000 for a house deposit. It will allow you to purchase a second property quicker and therefore diversify your growing portfolio quicker.

5.       What do tenants want

In city centre locations there is a clear preference for flats. Ground tends to be more expensive and in high demand and more people live in flats rather than houses. However, if you invest in smaller towns or villages, then houses are often the more attractive option as they tend to attract families who want to settle and rent in the area. A strong demand for flats in city centre locations does not only mean your property will be easy to rent out, it will also more likely lead to capital appreciation of your property which of course will be an important aspect of your property investment strategy too.

Having made the case for flats more or less so far, I want to list out all the advantages of houses too, so you will be able to consider these in your investment decision.

 Pro houses:

·       In complete control of the property

Unlike with flats, you are in complete control with your property when investing in a house. Of course, you will likely still have neighbours and council rules to abide by, but in general you don’t have to seek someone else’s permission before instructing works such as gutter clearing, roof repairs or external painting.

·       No factor fees

When calculating the profitability of your investment you will have to take into account all costs associated with the upkeep of your property. With houses there are typically no factor fees to pay. The flip side of course is that you will have to pay for all repairs and maintenance yourself, but at least you don’t pay anyone a fee to manage these repairs and as said above you decide which repairs should be carried out by whom.

·       No risk from damage through other tenants

I have lost count of the number of incidents where a leak from one flat into another has caused significant damage that had to be addressed with urgency and at significant cost. It is simply one of the risks that has an increased likelihood in flats. That’s of course not to say that in a house you can’t have a leak from your upstairs bathroom into the ground floor living room, but you are much more in control of these potential accidents and the way you can address a repair.

·       More attractive to families

I generally find that houses, even of they have just a little bit of outside space are more attractive to families with children. So, it comes down to your target market. If you are in an area with good schools and you are looking to let to a family, then a house can be the better option to let.

·       Tenants tend to stay longer

This point goes along with the previous one. Tenants in houses have a tendency to stay longer. It applies particularly to families. During the children’s school years most parents like the stability of staying in one place where they not only benefit from their choice of education but also from the social network they have built with the children such as clubs, friends and neighbours.

·       Some tenants like the higher level of privacy you get with a house.

Privacy is another consideration that can play a role for your tenants. Especially those with noise children might prefer the advantages of a house over flats where you would have to be more mindful of potential disturbing your neighbours.

·       Opportunity to extend into loft or outside

With a flat your options to extend or reconfigure can be quite limited whereas with a house you have more flexibility. Some properties can easily be extended into the attic which can give you a couple of extra bedrooms or they might benefit from a generous enough plot that lends itself to an extension. Either way, where land is in high demand, extending a property can be a good way to generate extra living space and value for your property. If this is a consideration for you then you might want to consider investing in a house.

·       More potential for capital growth

On average the potential for capital appreciation is higher with houses compared to flats. The increase in value is of course only one of the financial indicators that you might want to factor into your investment decision. Maybe the rental yield is more important for you as you are looking for immediate cash flow rather than capital growth. However, it is important to bear in mind that your prospects for investment growth are higher with houses.

·       No restrictive covenants such as no pets

Another tick in the box for houses is the fact that there are no restrictive covenants or ‘house rules’. Many flats have restrictions such as not being allowed to keep pets or only parking in your one designated parking space. With houses though you’re mostly in control and you can make your own rules for your tenants.

In summary, I would recommend the following strategy:
Start your investment journey with the purchase of a flat, but in the medium to long-term, diversify your portfolio to include both flats and houses and you can benefit from their respective advantages as described in this article.