Are houses or flats better buy to lets?

Is it better to choose a flat or a house for your buy to let investment? This is a very popular question for investors looking to buy a rental property.

I have experience of both, as I became an “accidental landlord” when I let out a flat I already owned. However, I’ve since sold it, and used the money from the flat to buy a house to let in Maidstone.

Let me explain why I prefer houses over flats, after first explaining the pros and cons of each from a landlord’s perspective. That said, these pros and cons are similar for any purchaser.

Flats as buy to lets

The crucial point is that flats share a building with one or more other flats, whereas houses don’t, although they may share party walls. This has lots of important consequences and risks.

1. What does leasehold mean?

For flats and other leasehold properties (sometimes houses are leaseholds), the building itself and the land it sits on, (the freehold) are owned by someone else. The freeholder may be the developer or even the flat owners of the building, if they’ve bought a share of the freehold together.

Each flat owner, or leaseholder, enters into a lease with the freeholder to own the flat for a fixed period of time. This is typically 99 or 125 for residential property. The length of the lease decreases year by year until it eventually runs out. Consequently, it’s an asset that will go down in value the closer it gets to the end of the lease.

When someone buys a flat, the leaseholder will assign (transfer) the lease to the new owner. The freeholder may need to give consent to the assignment.

During the term of the lease, the leaseholder pays ground rent and a service charge to pay for repairs and maintenance.

It can be hard to get a mortgage if there is less than 80 years remaining on the lease (Source: Zoopla), and lease extensions tend to be expensive, unless the ground rent is a peppercorn. Conversely, a cash buyer might see this as an opportunity to generate rental income for a cheaper upfront cost, and pay to extend leases.

2. Potential problems with leasehold properties

Firstly, until 30 June 2022, leases for properties on fairly new developments were often granted with “doubling ground rent clauses“. These are clauses obliging leaseholders to pay ground rent to the freeholders, and the ground rent would double after a set period of time. If the ground rent started at £250, and doubled every 10 years, this could become £2,000 after 30 years. To make things worse, the freeholder is not obliged to do anything in return.

These clauses are very unpopular with lenders (eg Nationwide), and they can make a property difficult to sell to anyone other than a cash buyer.

I experienced difficult questions when I sold my own flat, as the original lease had a clause where the ground rent doubled every 25 years. I’ve cut and pasted the reaction of the buyer’s solicitor into the graphic above. Luckily all the leaseholders of the block (including the former owner of my flat) had together bought the freehold, and agreed not to collect any ground rent. This meant the ground rent clause was no longer relevant and my sale went ahead without a Deed of Variation. However, it’s a real life example of why you need to avoid leasehold properties with these sorts of provision.

Although the new Ground Rent Act 2022 introduced a ban on these clauses, the ban only benefits new leases. This means that if you’re looking to buy an older flat, ask your solicitor to check if there’s a ground rent clause with escalating rent. And if there is, either look buying out the freehold with the other flat owners, or walk away.

The Competition and Markets Authority has taken action against some housing developers who have since undertaken to change ground rent clauses that double every 20 years or under. However, this wouldn’t have helped my clause as that was every 25 years. Click here for more information on ground rent clauses.

Secondly, leases often have restrictions that prevent the leaseholders from making structural alterations to the building. For instance, doing a loft conversion, or extending the property. This can make it more difficult to add value to the property. Having said that, do check the lease as some house conversions (like the flats shown above) do allow side return extensions and loft conversions.

Thirdly, service charges and other maintenance charges can be unpredictable. The service charge is set and administered by the freeholder’s management company each year. It is each leaseholder’s contribution to the cost of the insuring, maintaining, repairing and cleaning the building and common parts.

The lease agreement between the freeholder and the leaseholder contains the rules which determine how the service charge is calculated and shared among the leaseholders in the development.

Unfortunately, it’s not unusual for service charges to suddenly increase, without warning. For instance my own service charge increased from £1,500 to £2,500, and there was little I could do about it. Considering the monthly rent was £1,500, it made a huge dent in my already low yield.

This is a big potential risk that may affect the value of your property. Therefore, it’s important for ask your solicitor check if there are any limits on the annual increase. If you’re buying a new lease, you might be able to negotiate this.

A leaseholder in a large development has little control over the service charge or how much is allocated to the sinking fund for future repairs.

Take a look at the last three years of accounts for signs it’s about to increase. Often the accounts don’t layout forward spending plans. It’s therefore a good idea to study the notes of the last three annual meetings to see what the management company said. The questions can be particularly insightful. You can also ask the neighbours if they know of any issues.

Also, it’s important to flag the controversy regarding the remediation of flammable cladding on high rise blocks. If you’re looking for a flat, stick to low rise blocks without cladding to reduce your risk. At least for the time-being. For further information, I suggest looking at the cladding remediation resources on the gov.uk website.

Finally, the management company may also require flat owners to obtain permission to let the property. Although this is usually granted, there will be a process to follow, and a fee to pay.

3. The advantages of leasehold properties

As the common parts are the responsibility of the freeholder, the landlord isn’t responsible for repairing or maintaining the building, or looking after a shared garden. Although the landlord will need to pay for it through the service charge, it’s less to organise practically. This is great, assuming the management company is good!

Another positive side of a service charge is that capital costs for major work are spread evenly over time. And the costs are an average of the development.

Houses as buy to lets

1. Is it freehold?

Houses usually come with the freehold, and along with the freehold, comes responsibility for repairs and maintenance of the building and outdoor space. You’ll also be responsible for obtaining your own building insurance.

However, houses on some new developments are actually leasehold, with the freehold retained by the developer. Often ground rent and service charge are levied, so this is something to be cautious about.

2. Outdoor space

A big benefit of investing in a house is that it’s likely to come with outdoor space. Following the Covid lockdowns, this is something that renters have come to value.

Many landlords don’t make the most of the outdoor space, but I believe it having a nice low maintenance garden is a great attraction for renters. It may also enable you to charge a higher rent and means they’re likely to stay longer.

Be sure to make clear in the tenancy agreement that they are responsible for maintaining the garden. I buy a Flymo for tenant use, and state in the tenancy agreement that they must cut the grass regularly. It is also something I specifically cover when I meet prospective tenants.

3. Ongoing expenses

There are inevitably more repairs and maintenance for a landlord to organise if they own a freehold house as opposed to a leasehold flat. This is because the owner of a freehold is responsible for repairs and maintenance of the whole building and garden, inside and out. On the other hand, the leaseholder is just responsible for the “demise”, usually just the inside of the flat.

Although there’s no service charge to pay, landlords of freeholds should put money aside for improvements to the fabric of the building, eg the roof, windows, guttering and downpipes. Something is bound to need repairing (for me this year it has been a leaking roof), and having funds set aside of will give you a safety net and peace of mind.

However, the owner of a freehold house has more control than a leaseholder over when and how to maintain the property, and what improvements to carry out.

Conclusion

There is no hard and fast rule for choosing either flats or houses when looking at buy to let investments, as there are so many variables.

Flats tend to cost less than houses, which means the upfront investment is lower for landlords. They’re also a better option in cities and large towns. That said, there’s considerable variation between the cost of flats and houses, even in the same town, due to differences in location and specification.

Flats tend to attract younger renters and people living in towns. Recently one bedroom flats have become very popular in 2022. Flats can also be sought after by older “empty nesters” looking to downsize, without the hassle of a garden.

On the other hand, if the property is a leasehold flat, unless you’re the sole freeholder, you’ll not be able to decide how and when to invest in the fabric of the building and the common parts. This will always be subject to discussions with the freeholder. If you have a share of the freehold, you’ll need to agree with the others who share the freehold.

Of course, if the freeholder does the job well, not having to worry about the fabric of the building is a bonus. But if they don’t, or the service charge escalates, it can have a serious impact on the value your investment.

Houses appeal to a variety of potential tenants, from families and couples to older single renters. Houses do tend to attract longer term tenants, reducing tenant turnover.

The Covid lockdowns have certainly increased the popularity of properties with outdoor space. In particular, many renters now look for a home office for hybrid working and outdoor space, which favours houses.

Houses may also have the potential for greater capital growth through extensions, subject to planning, which is trickier with flats. Also, assuming the house is freehold, there is not the issue of a diminishing lease term or unpredictable service charges.

In conclusion, the decision boils down to what you can afford, the type of property you think will best fit your target market, your investment horizon and personal preferences. For me, houses tick every box. Having had my fingers burned with my flat in Cambridge, I’m sticking to houses from now on.

You may also find helpful

Landlord essentials: Tips on what you need for your Buy to Let

How to choose the best location for your next buy to let

How to self-manage your buy to let

Are limited companies best for landlords?

How to speed up conveyancing

What all new landlords need to know