Is Buying A Flat A Good Investment?

is buying a flat a good investment

Many property investors and savvy individuals have purchased a flat for an investment over the years, creating an additional form of income through renting it or through short term holiday letting such as Airbnb. If the flat is in a good location, the value of the property will also generally rise with the rest of the market. This has always made flats a lucrative opportunity for investors. But is buying a flat a good investment? Due to recent changes in the legal sector, leasehold properties are becoming both harder to purchase and sell, especially if you require a mortgage to do so. 

Online you see lots of articles professing the many benefits of buying a flat, but the dark side of owning a leasehold property is nearly not communicated enough, instead saved for the realms of online Facebook communities of fellow leaseholders experiencing issues, and thousands and pounds worth of demands to sell their flat.

After owning a flat myself, I have discovered these lessons the hard way, and I honestly think until you experience owning a flat that is only when you can ascertain whether it’s a worthwhile investment or not, for you. When purchasing a flat for an investment you do need to be going in with your eyes wide open, in doing so you definitely can and still will find fantastic investment opportunities, they are out there. Let’s take a look at the pros and cons as to whether buying a flat is a good investment.

Is Buying A Flat A Good Investment? 

The Pros

Cheaper To Purchase

Flats are generally cheaper to purchase than houses, so less investment is required to get you going. As buy to let mortgages require a larger LTV (loan to value) this makes a flat as an entry level investment much easier.  In addition to this, it’s easier to build up a portfolio of flats over time.

Maintenance Costs

As you pay a set service charge for a flat annually, any issues that arise in the property are dealt with and managed by the freeholder or managing agents so you don’t need to budget for any huge, unexpected costs.

Great Rental Opportunities

Flats offer great rental opportunities for couples, single people and small families who are looking for flats to rent. If you are positioned in an enviable location, marketing on Airbnb can provide an even more lucrative income stream, although you do need to take into account seasonal slumps for holiday lets. If you are situated in a student location, it is possible to earn an exceptionally good rental yield over time, especially if the flat has more than one room. 

More Security

Flats do often come with more security than houses which helps to protect your flat from any unexpected damage. Some flats come with intercoms, are gated or have video intercom. Whilst this is not the same for all flats, this does mean you don’t need to worry about paying out for additional security if it already comes with the flat.

The Cons

Leasehold Property 

The main drawback of owning a flat is that it’s a leasehold property. There are a number of things to consider when purchasing a leasehold property to understand whether buying a flat is a good investment, you will need to study the lease with a fine tooth comb. The key areas for consideration are;

  • The ground rent terms – what is the current level of ground rent and what are the terms of the lease for ground rent increases. Ground rent over £250 (outside of London) becomes an AST, assured tenancy agreement. This means that if the ground rent is not paid by the demand date, the freeholder could take possession of the property. Even if ground rent levels don’t currently exceed this, if it does in the near future this is suddenly an issue for anyone wanting to purchase the flat in the future who needs a mortgage, as mortgage lenders are stamping down on flats with onerous ground rent levels. This WILL affect future saleability of a flat, so if you’re investing in it then you need to understand the ground rent levels now, and what they could be in the years to come to avoid any issues further down the line. 
  • Service charges – unlike ground rent, service charges are unregulated and can be increased by the freeholder pretty much whenever they like. You’ll want to see the last year of accounts for the flat you are purchasing and factor in any rising costs. If you are renting or letting on Airbnb, you need to factor in rising service charge costs to work out an accurate rental yield. 
  • Length of the lease – This is another major factor that your solicitor will be able to advise on. The longer the lease the better, anything below 80 years should be avoided like a barge pole. The value of the flat will start to drop as the lease goes under this mark as increasing the length of the lease can run into the cost of thousands of pounds, which would destroy that investment you have made, virtually overnight. 
  • Freeholder/Managing Agent – Do careful research on the freeholder and managing agent prior to purchasing to get a feel for how they operate, and are to deal with. 
  • Operating a business/holiday letting – some leases will strictly forbid the use of the flat commercially, or to run a business such as holiday letting. If you are found to be doing so, the freeholder could take possession of your flat and you could default on your mortgage. This defeats any object of buying a flat for an investment, so you need to research this in advance.

It’s Difficult To Add Value

It’s very difficult to add considerable value to a flat as you are restricted by size, and terms in the lease. Any alterations must go through the freeholder which will come at a cost, this can vary anywhere between £200-£1,000+, just for an enquiry. Extensions or adding loft rooms can’t be done, and modifications that you request may also need to be approved by neighbours. This can even include details such as changing flooring or doors, everything like this has to go through your freeholder. You have very little control over owning a flat vs a freehold property. 

Slower Rise In Market Value

Flats tend to have a slower rise in market value than flats due to less demand in flats from families and first time buyers. Also high rise flats as they particularly only appeal to a certain demographic. The cladding on high rise buildings is still an issue with thousands of flats across the UK as they are exceptionally difficult to sell.

In Summary, Is Buying A Flat A Good Investment?

Flats do represent a good property investment when purchased in an enviable location, and when everything in the lease stacks up. You do need to be mindful that you are purchasing a leasehold property and there are many more costs that do come as a result of this that you just don’t get with buying a house (freehold) property. Although, as flats are cheaper, it’s generally easier to continue building up your property portfolio with flats. 

Do your thorough research on the lease, survey the value of flats in the area over the last few years and if anything doesn’t stack up in regards to the lease, back out before you incur lots of additional expenses further down the line. If you are still interested in purchasing a flat as an investment, you might want to read my post on the pros and cons of buying a flat in the UK.

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