Estimated Read Time: 8 minutes
Editor: Mark Callacher
House vs apartment – which makes a better investment?
I have often been asked which makes a better investment. - Houses or flats?
The answer to this is not straight forward, and it all depends on your calculations. The basic calculation you must determine is your ROI, return on investment (see post here to see how to work this out: http://www.prosperbyproperty.com/single-post/2016/09/04/How-To-Work-Out-Return-On-Investment)
ROI = annual Net income/initial money in * 100
The word NET is important in this calculation and it is your total income from rent (gross) minus ALL your expenses, mortgage payments, bills, maintenance, lettings fees, insurance etc. (NET). The initial money in is my deposit.
The standard calculation in the property world is yield:
Yield = Gross annual rental income/full cost of the property.
I would calculate both, but ROI is much more useful to me when buying as it gives a more realistic prediction on how that property will perform in terms of monthly cash flow. To us, if it does not produce a profit at the end of the month it is not a particularly wise investment.
If you were to use yield alone to see whether houses or flats are better investments, then flats will on average stand out to have better yields than houses in the same area, simply because, in general they are cheaper, but still achieve relatively high rental income. However, if you take into account all outgoings and compare ROI then flats may not necessarily be the best option.
Flats tend to have an increased annual outgoing cost, for example all flats are leasehold and will tend to have an annual ground rent cost which currently on average is between £200 and £250 per year, obviously this will increase depending on the area, make sure you know this before you purchase. The other factor to be aware of is the terms of the ground rent review, any respectable review should only be reviewed every 5 to 10 years and fall in line with inflation, make sure you ask your solicitor about this, If your ground rent is due to double every 10 years there is a good chance it will be much higher than inflation. Ground rents can become very costly, and make it difficult to sell in the future.
Flats will also inevitably have service charges (the cost of maintaining communal facilities), this can be £200 plus per month and will be significantly detrimental to your ROI. Make sure you know this! Along with the terms of its review.
Houses will tend not to come with service charges but may have ground rent fees if they are leasehold. Houses however may incur more maintenance costs, for example if you have a roof leak it will be you who is responsible for fixing this, in flats this should be covered by the management company. Houses also tend to be more expensive than flats, (when comparing like for like, e.g. comparing new build two bed houses to new build 2 bed flats – not HMO’s which are a different, but profitable, strategy).
So to answer which is a better purchase for an investment, houses or flats? - It all depends on the numbers. It is only you who can answer this by taking into account the above along with other things such as demand, ease of management, re-saleability, location etc. However, for me if the ROI doesn’t stack, then any other factor becomes negligible in my decision as to whether it is a good investment or not.
- Enjoyed the post? Please leave any feedback on the comment section below.
- Sign up to Prosper By Property newsletter to get more property tips.
- Would you benefit from 1v1 property mentoring? Join many of our previous students who have created financial freedom within a matter of months by working alongside us. For more information get in touch at: firstname.lastname@example.org