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A figure places money into a jar representing a sound investment. SAM Conveyancing answer: Are Flats A Good Investment?

Are Flats A Good Investment?

16/01/2024
(Last Updated: 15/05/2024)
675
13 min read

Are flats a good investment?

Flats are often cheaper, making them an easier first step on the property ladder (or first investment property!). They make great homes, are often more energy efficient, and can return a good rental yield. However, you'll need to factor in service charges and ground rent. They may not appreciate in value as fast as freehold houses, your lease terms may prevent you from renting the property to tenants, and they can take a bit longer to sell.

We'll break down the answer into a few different scenarios, so you can consider the pros and cons when asking: is it worth buying a flat?

You should always get a flat survey before you buy.


Are flats a good investment versus continuing to rent?


Benefits of renting

With rental costs so high in the UK, many of us are beginning to resent throwing such a large portion of our monthly earnings away. However, in many cultures, owning your own home is less common. There are many benefits to renting where you live. You are not responsible for maintenance, you are unaffected by fluctuations in house prices, your bills will be lower and you have greater freedom to move at a month's notice.


Building equity in your investment

If you are able to save enough for a deposit, investing in a flat means your monthly mortgage payments will be building your equity, essentially going into your own pocket, which is incredibly attractive to people who want to have an asset for the future, to fund their retirement or to bequeath to their children.

This relies on the property holding its value or increasing, which has been the historical trend. But, if you buy with a small deposit and then the value of the property comes down, you may find yourself in negative equity (you owe more to the mortgage lender than the property is now worth). Generally, if you can sit tight and continue paying off the mortgage, the market will recover in time.


Investing in additional income

Depending on where you live in the country and how much you have for a deposit, you might be able to buy a two bedroom flat with a monthly mortgage payment that's not much more than what you were paying in rent. This can give you an added income stream by renting out the spare bedroom to a lodger (£7,500 per year tax free*). Some people choose to do this short term, so they can build equity in the property faster, or save for a major life event, like getting married, retraining for a new career, going travelling, or having a child.


Are flats a good investment versus buying a house?

We compare the pros and cons of houses versus flats in another article: Should I Buy a Flat or a House?


Affordability

Flats are usually more affordable, which means you may be able to buy sooner. In theory, the sooner you get onto the property ladder, the sooner you can pay off your mortgage, and the smaller your debt versus your assets, the better, whether you are living in the property or renting it out. In terms of the savings you will make by living in the property, flats are cheaper to run as you'll likely be sandwiched between other heated homes on either side and/or above and below.

You'll have to pay service charges, but this means the building maintenance costs are split between the flats in the building, so repairs to the roof, for example, should only cost you a fraction of what they might be if you owned a whole house. You'll also get the benefit of leaving these things to be handled by the building manager.

Lenders typically view houses as lower risk, so flats can be harder to get a good mortgage on, particularly if you're working with a smaller deposit. Our independent mortgage advisors can help you find a selection of appropriate mortgage products and submit an application with the best chance of success.

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Risks of investing in a leasehold flat

Almost all flats are leasehold, although some may come with a share of the freehold. There's nothing wrong with owning a leasehold, but you'll need to understand a few potential risks. Beware of short leases, high ground rent, unreasonable service charges, or signs of a badly managed building.

You can increase the value of a short lease flat by extending the lease and reducing the ground rent to peppercorn. However, your statutory rights to formally extend a lease don't apply until two years after the property is registered in your name, and there are various reasons why these rights may not apply to a certain property. Your conveyancing solicitor can help to clarify this for the property you are purchasing.

New legislation brought in following the tragic Grenfell Disaster means that many apartment blocks are undergoing remediation work to make them safer. If your flat is in an affected building, there may be additional work involved in obtaining an EWS1 form to evidence that the building has been properly assessed and is safe, or a deed of certificate to evidence that leaseholder protections apply and you will not become liable for remediation on purchase. This will satisfy most lenders when granting a mortgage.

Don't have a conveyancing solicitor yet?

Get a free, tailored, no obligation conveyancing quote from our hand selected panel of leasehold specialists. Your quote is fixed fee and your purchase is protected by our no sale, no fee guarantee.



Investing in property development

If you are looking at developing a property to increase the return on your investment, a flat may not be your best option. You won't have a loft, basement, garden or garage to convert or extend into, and the terms of your lease may limit what internal changes you can make.

You'll also have multiple party wall agreements to arrange with the owners of adjacent flats, where you plan works affecting those walls. Although houses are still subject to restrictions such as building regulations, planning permission and sometimes conservation areas or listed building legislation, you can usually do more to develop a freehold house (especially if it is detached or semi-detached).


Is it worth buying a flat as a buy to let investment property?


Rental yield and occupancy

Flats make excellent buy to let investment opportunities, particularly in large towns and cities, and even more so where they are located in proximity to a university; these are always in high demand and you can generally rely on having a high occupancy rate. However, more affluent families prefer houses with more space and, ideally, a garden, so your rental yield would be slightly higher on a house.


Building a diverse investment portfolio

If you are looking to build a buy to let portfolio, flats are an excellent way to hold multiple, more affordable properties to diversify your portfolio and minimise the risk. For example, you might have three different flats in different areas which appeal to different demographics, as opposed to one house. If you have a problem with one of three smaller properties, you're more likely to be able to weather the issue financially than if you had a problem with a single, more expensive house.


Capital gains on investment flats*

Houses grow in value faster than flats do because the clock is always ticking on the lease term on a leasehold flat. This makes houses a better investment if you can afford to buy one and sit on it for many years. However, new 999 year leases are beginning to emerge, which many consider being 'as good as freehold'.

As we mentioned earlier, capital gains rely on the general upward trajectory of property values. There is no guarantee that houses will continue to grow in value indefinitely. Prices fell in 2008/2009 and many homeowners fell into negative equity. It is important to consider whether you are in a position to wait out any potential falls in the market on the assumption that prices will eventually recover. If you are likely to have to sell the property to get your money out at short notice, then you need to be aware that you could have to sell at a loss.

Capital gains tax is payable on buy to let investments, whether you own a flat or a house.


Should I purchase my buy to let investment flat through a limited company?


Tax benefits of investing in a flat using a limited company*

If you intend to hold more than one buy to let investment property, there are potential tax benefits to setting up a limited company and using it to purchase the flat. This really depends on your personal circumstances and intentions and we discuss the pros and cons in more detail in our article: Buying Property Through a Limited Company.


Personal liability when investing in a flat using a limited company

You will have to personally guarantee the mortgage as the company director, so you will still be ultimately liable for the mortgage. Our panel of expert property solicitors provides independent legal advice on the risks of these specialist mortgages to make sure you don't get blindsided by an unfair mortgage deal.


Is it worth investing in a flat jointly as private individuals?


Protecting your investment in a flat

Buying a flat with another owner is a good investment if you properly protect it against a potential breakdown of the relationship between yourselves. Investing in property is expensive and a risky investment if you don't protect your interest with a watertight deed; a vulnerable investment is a bad one. You should carefully consider your co-ownership options if you are buying with anyone who is not your legal spouse, whether you are buying a flat to live in or as a buy to let investment.

We offer several solutions including our basic deed of trust, at £299 including VAT. This allows you to declare what share of the equity you are each entitled to, as well as your intentions for the property, and how you'll handle things if or when one of you is ready to cash out.

We can also draft bespoke deeds, or a floating deed, which includes a 'floating' formula through which your shares will adjust based on your ongoing contributions to the property. This can be beneficial if one of you is unable to pay the mortgage for a stretch of time, and the other pays it in full, or if one of you pays a substantial sum toward maintenance or renovations and you would like these contributions to be reflected in your shares.


Tax efficiency for married joint owners*

You will be taxed on rental income and capital gains on a buy to let investment flat according to your shares. Married and civil partners often choose to divide the asset unequally so that the owner who pays income tax on the lower bracket holds the larger share of the property, getting the greatest net return on the investment as a couple.

However, this means that in the event of a divorce or dissolution, the owner who holds the larger share will own that share of the property when the assets are divided unless overruled by the family courts. Learn more about how this may work for you in our article: HMRC Form 17 Income Tax Declaration for Married Couples.


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Caragh Bailey, Digital Marketing Manager
Written by:

Caragh is an excellent writer in her own right as well as an accomplished copy editor for both fiction and non-fiction books, news articles and editorials. She has written extensively for SAM for a variety of conveyancing, survey and mortgage related articles.

Andrew Boast of Sam Conveyancing
Reviewed by:
Andrew started his career in 2000 working within conveyancing solicitor firms and grew hands-on knowledge of a wide variety of conveyancing challenges and solutions. After helping in excess of 50,000 clients in his career, he uses all this experience within his article writing for SAM, mainstream media and his self published book How to Buy a House Without Killing Anyone.

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