The bigger the property, the better the investment. Or so you would think. In fact, smaller properties and flats are more likely to generate a rental income because rents for larger, more expensive homes are often unaffordable for average earners. Not to mention the other costs involved in owning a larger property.
With this in mind, investors should consider all types of property for the best investment. Much depends on your personal circumstances and budget of course, but ruling out a house just because it has limited space isn’t necessarily a wise move.
Flats and Apartments
Investing in low entry priced flats provides a fantastic route onto the property ladder, especially if situated in prime city centre locations or areas with high student numbers. Many post-grads seek out premium-quality, low-rent apartments as they begin their working life, especially those with built-in utilities and high-speed broadband.
This is something echoed by Camilla Dell of consultancy firm Black Brick, who says:
“Generally speaking, flats make better buy-to-let investments than houses, especially two-bedroom, two-bathroom flats which many young professionals favour and can share with a friend, partner or co-worker.”
One advantage of larger properties is that you can convert rooms into additional bedrooms, thus increasing your earning potential. Modern-day professionals, especially in London, are increasingly willing to house share. Mainly because they simply can’t afford to rent a property on their own.
There may also be an oversupply of flats in some areas, which combined with a housing shortage, will assure that house prices remain secured. Additionally, nearly 250,000 families chose to rent in 2016 according to Alliance & Leicester, meaning there is definitely demand out there in certain areas.
However, buyers should take note that the more expensive a property is, the higher building surveys, conveyancing fees, service fees, and arrangement charges will be. Increased stamp duty incurred over multiple brackets will also affect your short-term profits. A lot of city centres are also lacking in space, meaning land is very expensive. The more land your property will take up, the higher the premium you’ll pay for it. This is another reason flats defeat singular homes in big city centres.
Investing in a large, costly property may eat away at your disposable funds, thus restricting the chance to grow your portfolio. Acquiring multiple homes has fantastic benefits for buy-to-let investors, helping relieve a lack of earnings if one property sits empty between tenants, for example.
Once on the market, you can offset the value of your existing property (or its expected capital gains) to pay a deposit on a second property, and so on. Likewise, obtaining a new buy-to-let mortgage is easier with this collateral in your name, especially whilst interest rates remain low.
As an investor, you must evaluate which area has the strongest and fastest growing level of tenant demand for a particular type of property. How big the property is doesn’t matter too much, as long as enquiries are guaranteed. For example, young professionals are likely to rely on one-bedroom apartments near to their work or transport links and students will opt for the cheaper studios closer to their place of study and city amenities. Then you have the couples that want more space, but aren’t ready to commit to a home yet, who will opt for a 2-bed apartment. It all really depends on the area and the target market for the property.
As rents are expected to rise across the board through 2017, even a smaller property can generate yields as high as 10%. This is especially the case in buy-to-let hotspots around the UK such as Manchester, Liverpool, Plymouth, Leeds and Edinburgh. Seek professional, managed lets to secure your long-term investment strategy, with guaranteed rental income along the way and a secured exit strategy if required. Keep in mind your target tenant and apply that rule to the size of property purchased.
You can take a look at our investment opportunities in the current UK buy-to-let hotspots here.
If you’re unsure of where you’d like to invest in property, you may be interested in why 2017 Is The Year to Invest in The North.