Houses or apartments: which makes the best buy-to-let investment?

 In Property Investment

One of the most common questions asked by all investors, especially those looking for a change in their portfolio or just starting out in the property industry is: “is it better to invest in houses or apartments?” (Your Move). The simple answer? This completely depends on what you would like to achieve and what your overall investment plans are.

One of the most impactful differences between investing in houses and apartments is the tenure – houses are freehold, meaning that you as the investor will own the land that the property sits on; whereas apartments tend to be leasehold, meaning that you will have to take into consideration the cost of ‘renting’ the land from the owner, and possible additional service charges. With this, investors may also have to consider how much work they would like to do to a property. While you will most likely be permitted to make changes to any property that you purchase, there may be stricter restrictions on apartments, especially if you don’t own all of the units in the block.

If you are considering investing in apartments there are a few things you should consider: how many years are left on the leasehold; are there any restrictions for possible tenants e.g. parking restrictions; and how much is the service charge and ground rent (Your Move)? It is, however, important to consider that typically the purchase price of apartments is lower than that of houses, meaning that you may still be spending less on your investment even with ground rent and service charges. There is usually also higher discounts on apartments bought in bulk than houses, which could also add to the rental yield you can expect or the capital gains from selling the properties on (Progressive Property).

Rental yield is something that can make a big difference in an investors decision to go down the route of investing in houses or apartments. Research conducted by Mortgages for Business (2017) found that houses in multiple occupation (HMOs – which covers both houses and apartments) has the highest rental yield in 2017 at 8.9%; mainly accommodation with students, young professionals and young couples without children. This was closely followed by multi-units (for examples, apartments) with a similar demographic with yields of just over 8.1%.

While these figures may be essential to investors looking for long-term rental yields, investors who are looking to sell their units on after renting them for a number of years should also consider capital gains when deciding what type of property to invest in for buy-to-let. Recent research from Zoopla (2017), which looked into the capital gains growth of different types of properties over the last 5 and 20 years discovered that semi-detached houses had the highest capital gain in the last 5 years, while apartments had the highest capital gain in the last 20 years. It’s also important to consider the overall profit from your investment; while apartments have seen the slowest capital gain growth in the last 5 years, the higher rental yields that can be gained from this type of accommodation should be taken into consideration in the final sale price you could get for the property if you plan to sell on (Simply Business).

There is no clear better option overall for whether it’s better to invest in houses or apartments – it completely depends on the type of investment you want to add to your portfolio, how different types of properties will affect your portfolio, and your long-term goals as an investor.

Here are the general advantages and disadvantages of investing in houses and apartments in the UK as outlined in a recent article by Progressive Property (2018):

Investing in Houses:

Advantages

  • Some landlords will find it easier to find long-term tenants (24 months +) when letting out a house, particularly to families
  • Finance for single family units is more readily available
  • There is more potential for capital growth in the short term with a house, however figures have shown that long-term apartments can gain more capital
  • There is no high service charges or issues with ‘common areas’ not being maintained other than with mews housing

Disadvantages

  • There are typically higher investment and start-up costs with houses
  • There is a higher stamp duty and interest cost
  • There is typically higher ‘wear and tear’ costs as houses have a higher attraction value for families with children and pets, or undergraduate students

Investing in Apartments:

Advantages

  • The entry purchase price of apartments is typically lower than houses
  • There is a strong demand for this type of accommodation in metropolitan areas, particularly between young professionals and mature students causing a rise in property prices
  • Apartments typically have a higher rental yield than houses and a higher cash on cash return
  • Apartments are a better option for bulk buyers, as the lower purchasing cost makes it easier to purchase a larger bulk
  • While there may be some restrictions on how much renovation you are able to do with an apartment, it’s generally easier to add additional rooms
  • The cost of maintenance for apartments is shared and more often than not any repairs will be organised by the freeholder or managing agent

Disadvantages

  • Some apartments may have high ground rent and service charges
  • There is less opportunity and freedom to add value without the consent of the freeholder
  • It can be more difficult to get finance on leaseholds less than 80 years
  • If planning on selling the property on, it can be more difficult to sell on to some buyers who value uniqueness in their purchase
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