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My own landlord experience has made me realise that houses are a much better investment that flats (outside London). I've put together 10 reasons why:1. Houses are freehold, flats are generally leasehold.2. Cash flow is better off a house than a flat, as flats/apartments have service charges that bite into cash flow.3. You can extend a house, put on a conservatory, do a loft conversion, convert a garage into an extra room etc. You can not do any of that with a flat! All these things ADD VALUE.4. Houses have gardens/useable outside space and storage. Flats are restricted on both fronts.5. There is an over-supply of flats, and less and less houses being built, meaning that houses will be at a premium.6. With more and more people working from home (a growing and long lasting trend), space is going to be an important consideration and houses can offer a home office in the garden or over a detached garage.7. Flats are supported by the amateur investor market and first time buyers - meaning that they are very volatile with both rental and selling prices extremely fragile. Houses are supported by more sophisticated investors and family buyers, meaning that they have more stability in the market place.8. Houses can be let in single occupancy or multi-let formats, giving you more flexibility and less chance of voids.9. Houses open up your tenant market to families, house sharers, and therefore have wider appeal and tenants that want to put down roots and stay longer - especially if they have children in local schools. Families do not tend to rent flats!10. Mortgage products are more favourable for houses than flats on the LTV front, meaning lenders see houses as lower risk. That should tell you something!Related content:The decline of FREEHOLD and the rise of LEASEHOLDHouses becoming an endangered species
Vanessa Warwick Landlord and Co-Founder of PropertyTribes.com **If you have got value from Property Tribes, find out how you can support it in remaining a free to use community resource**
Also, forgot to mention .... I've heard it reported several times that amateur investors are not paying their service charges because of the credit crunch or they are NMD buyers and can't afford to pay it.This means that blocks of flats are starting to deteriorate, communal areas being left uncleaned etc. As an individual owner, you have no control over this.It's a downward spiral, because if maintenance and cleaning suffers, capital and rental values start to be compromised, and tenants do not want to rent there.We have a variety of houses and flats in our portfolio and the houses outperform the flats on rental yields and occupancy .... EVERY time!
My take. A bit of devil's advocate plus pointing out some holes in the logic presented by Vanessa.1. Freehold vs. leasehold is just one aspect. Freehold is not automatically better. Focus on the numbers and the details.2. A bad assumption. See the related forum discussion here3. You can not make the changes suggested to most flats. You can make some changes to improve the value to many flats. Splitting a room, changing the layout, and some other things come to mind. Focusing on improving the value is a good ideas independent of if the property is a flat or house. Knowing the planning laws also matters as some houses can not be extended given prior changes or other restrictions.The most cost effective changes are normally cosmetic so fresh paint and other things can be gold mines no matter what the property type is.4. True. That is also why flats are less maintenance plus better for lock and go residents. #4 is mostly a style issue and not a reason why one will make a better investment over the other.5. False as a general statement. False because all you need is one example to disprove the general case.What is important is to understand supply and demand for housing in general in an area and for the specific type of housing being considered. There are many freehold homes in parts of the North that are hard to give away given demographic shifts. Not all cities have an oversupply of flats compared to demand. All about pricing and local conditions.6. Home offices are important. That is why some folks looking for a flat want a 2 bedroom property and not a 1 bed. The idea that people working from home will focus on a shed or other room that has to be added is a giant leap. More likely is the case where people look for an extra bedroom.The best work from home situations depends on good infrastructure. City centre can mean better or faster broadband. ADSL-2 is much more common in city centres. This will continue to change with time so the factors that are important will also change over time.7. Further speculation. You can find a lot of flats that are owner occupied while you can find streets that are mostly all rentals even through they are freehold homes. What is important is the mix of owners. For the most part owner occupied areas are going to have more stable pricing. The specific type of construction or style matters less. What people want is what is most common in the area where they are looking.If you look in central London most people can not consider freehold homes so they look for flats. Period flats might be in higher demand in some areas. The top consideration for adults is normally the commute to work while families with children normally let the school choice dominate the location.If you want to avoid areas with transient owners or tenants focus on the schools. Just expect that properties that are popular with the owner occupants are very likely to have worse cash-flow.Owner occupants will over pay compared to what an investor needs to see in terms of a return on the investment. Pride of ownership vs. yield. Owner occupants rarely could even calculate a yield or consider the local rent levels.8. True but at a cost. If you go for a multi-let you need to upgrade the property to the HMO standards, you might have to pay for a license, weekly fire alarm tests are required once you hit the HMO specification and you are limited in your financing options.Highest and best use is important. Just do not assume that taking a home and turning it into a multi-let is simple, easy or free money.A flat is going to stay a flat. You might be able to turn a 1 bedroom into a 2 bedroom if one person uses the living space. Rarely will people who are thinking about a flat want to go that route. At best a 2 bedroom might be shared by 3 or 4 people if there is 1 or more couples.High density use (HMO or otherwise) comes at an added cost as you get much higher wear and tear.9. Families do rent flats if they have small children. Mostly of the time the family will have only 1 child and when number 2 comes along a switch to a larger property is the plan.That said flat owners do benefit from not renting to families with children. Children can increase the wear and tear. Hence children is not always a positive in terms of a rental.What should be noted is a family is much less likely to move. Once they are happy in a location there is much less reason to move the children to a new location unless forced by external circumstances.10. The LTV levels for one type of property or another is not a good indicator of what makes sense. Just look back a few years. The LTV levels for flats were high and history has shown the lenders were not that good at predicting what would happen.Be conservative in your use of debt. Make sure the properties will cash flow. If you can borrow more or less do not assume that the lender or the average LTV allowed is anything more than the lender's criteria. It says nothing useful about the possible success for the investment. Many homes and many flats are being repossessed. How and why that is taking place is best debated in another thread. Assume nothing about a flat based on the LTV a lender will allow.Tangent: More deals where done off plan using flats because the construction period favored off-plan sales. That bias in the process is one reason why lenders have issues with LTVs on new build flats.Conclusion?The details of a particular deal and the investor's position matter the most. While people say and do things based on broad sweeping statements the reality can be very different.Similar to how we focus on the unemployment figure but not on the employed figure. 10% out of work implies 9 out of 10 people still working. Flats are today's whipping boy. More likely there will be a deal to be done on a flat if they are out of favor. Looking at the rents achieved in many cities someone still loves them.John Coreyhttps://www.ChelseaPrivateEquity.com/blog
I host the London Real Estate Meet on the 2nd Tuesday of every month since 2005. If you have never been before, email me for the 'new visitor' link.
Also happy to chat on the phone. Pay It Forward; my way of giving back through sharing. Click on the link: PropertyFortress.com/Ask-John to book a time. I will call you at the time you selected. Nothing to buy. Just be prepared with your questions so we can use the 20 minutes wisely.
Interesting views.I think both views have a valid point/s also holes as "sweeping statements" suffice it to say there are no 100% right reasons period, only the right reasons for the Landlord.What anyone who reads this should take from it is that each one of the points above could be "torn apart" (if we wish to split hairs) but on the other hand if they suit your strategy then so-be-it.The good news is that we have a choice.Nick
general operations director, site owner and moderator - propertytribes.com
My experience is not in line with yours Vanessa.When we purchased our first ground floor flat 5 years ago it needed a lot of tlc and upgrading. A en suite was included in the upgrade and our first tenants (sharers) are still there.The garden is communal but it is not uncommon to see garden furniture outside the properties and there is outside storage for this furniture and other items. The maintenance charge (£200 p.a.) is a lot less than a gardener would cost. We have 2 other ground floor flats that have courtyard gardens with private access and these too are very popular and the service charges are very reasonable at £33 p.m.My experience is that tenants do not want to tend gardens and are not bothered too much about the outside appearance of their rented accommodation either.With the detached houses purchased, we have had the gardens professionally landscaped with evergreen plants in low maintenance surroundings. The tenants in our houses range from sharers, professional couples and only occasionally families. We also pay service charges on several of these houses for communal area upkeep such as car parks and roadways.When purchasing a flat we look for those that have a share of the freehold where possible but it is really the location and market demands that dictate. With the ever growing number of divorces there is a real need for accommodation for those newly single people too.At a recent AGM it was reported that it was owner/occupiers who were the culprits not paying the maintenance charges not the landlords. Investors outnumbered the residents which makes me believe that investors do care about maintaining and safeguarding their investments. This has been further proved by my involvement in the management of a small block of flats. All flats are owned by absent landlords with varied portfolios from 2 to many and without exception all are actively participating in maintaining and improving the premises.Although we have made many mistakes along the way, I am pleased to say that our varied portfolio is improving and hopefully so am I.Vanessa said:
Also, forgot to mention .... I've heard it reported several times that amateur investors are not paying their service charges because of the credit crunch or they are NMD buyers and can't afford to pay it. This means that blocks of flats are starting to deteriorate, communal areas being left uncleaned etc. As an individual owner, you have no control over this.It's a downward spiral, because if maintenance and cleaning suffers, capital and rental values start to be compromised, and tenants do not want to rent there.We have a variety of houses and flats in our portfolio and the houses outperform the flats on rental yields and occupancy .... EVERY time!
It's great to hear different view points and experiences - makes for a good discussion! If it works for you, that's all that matters! If you have a variety of properties, then it probably spreads your risk too.
Vanessa,I agree. A variety of opinions is good for a forum.On the idea of spreading the risks.Warren Buffett and others who are really wealthy down play diversification. Warren goes so far as to claim diversification is a marketing tool used by Wall Street to sell stuff to investors. Wealth comes from focus and concentration. A few eggs in a basket that you watch closely.Put another way, the focus is the same as developing a skill and apply deep knowledge to an area. To become an expert and then make money by leveraging your expertise.John Coreyhttps://www.ChelseaPrivateEquity.com/blog
A very interesting thread with though provoking points on both sides. But I disagree completely with the whole 'diversification is a marketing tool' sentiment.
So going to stocks as an example: by that logic we should do our due diligence carry out research on all the technical and fundamental indicators, take provisions to mitigate and calculate your risks and worst case scenario but put all of our life savings in one stock??? .
You don't know what might happen, you could be wrong about something in terms of risk estimation, something you missed: a 1 in 10000 event could wipe out your complete portfolio. It's just impossible to take everything into account. Whereas if you took the opposite extreme had a balanced portfolio for example of stocks, bonds, property, hedge funds around the world, the probability of your portfolio being completely wiped out (or experiences a big short term downswing) is order of magnitudes lower, I imagine it would take a world wide apocalypse for your portfolio to be wiped out, not so with the first example.
I think the cynicism has gone a bit far...
"Warren Buffett and others who are really wealthy down play diversification. Warren goes so far as to claim diversification is a marketing tool used by Wall Street to sell stuff to investors. Wealth comes from focus and concentration. A few eggs in a basket that you watch closely."
That's OK.. if you're Warren Buffet.
nick tadd said:
Nick,Spot on.This is why I tell people to focus on each deal rather than macro level trends or broad definitions (flats vs homes). If the deal works the deal works. Take a long view in terms of ownership so cash-flow is the top factor.John Coreyhttps://www.ChelseaPrivateEquity.com/blog
HiAgree with Vanessa's original post and all the subsequent posts.Also want to add to Point 5, the over supply of flats will mean that this type of prop will not recover as fast as the houses.My definition of over supply is based on the number of flats in Birmingham/Manchester city centre sitting empty. I went to see some flats not so long ago, when i asked the valuer to go out to get me some figures he told me that the apartments were buit over 3 years ago and these were still with the developer...he had been out to other flats in the development before.I agree with alot of the comments regarding service charges and flats but some of the investors i have worked with have been highly geared, thought the prop market will always steam ahead and spent all their cashbacks from NMD's on porsches and ferrari's...lol i have a Q7, then doesnt count. These guys are the ones that are struggling now because instead of putting these funds aside to pay for shortfalls and service charges they spent the money, thinking that the next NMD will pay the shortfalls.This works while the market is good, but cycle of borrowing money to pay shortfalls was always going to come crashing down.I also think Freeholds are better as you are in complete control of your property and what happens to it...maybe im just a control freak.The issue with people not paying the service charges should not really exist as if the Freeholder told your lender then your lender will pay the service charge and add the amount to the loan amount. They can do this as it part of the mortgage conditions. They do this as part of Service Charge is used to pay the buildings insurance on the prop...they are looking after their security.Service charges and ground rents vary as well....i have friends who are paying £80 a month in service charges and £200 pa in ground rent. I know of investors paying £1500 service charge per apartment and then £75 everytime the tenant moves in..and before that they have to pay a one off fee of £150 if they are investors...its in their lease and the solicitor never picked it up or at the time the charges were tba as the Maintenance co had not been appointed.Its all swings and roundabouts really but i always stress that Due Diligence is very important.RegardsWasim