Property is a good investment.
Flats are the second most common type of property in the UK.
And they usually cost less than houses in the same location.
So, many people choose to invest in them.
So, is buying a flat a good investment? What ways to invest in them are there?
Let’s take a look.
Ways to invest in flats
1. Live in the flat
Living in a flat (or having family members live in it) is a common investment method.
Over time, the flat is likely to increase in value due to the increase in property prices in the area.
This increase could be maximised if it’s well-maintained or (if needed) renovated.
2. Rent the flat out
Renting out property is a good way of getting value from it.
The flat will likely increase in value whilst you also benefit from your tenants’ rental income.
You can get a special buy-to-let mortgage, too, which only involves paying off the interest on the property.
3. Flip the flat
Flipping a property refers to buying, renovating, and selling it within a short time frame.
It’s often done by companies or individuals with experience in renovation. However, sometimes it’s done by investors who outsource these tasks.
How have flat prices changed in recent years?
The last 12 months
In the United Kingdom, flat prices have increased by 0.1% in the most recent 12-month period. This equates to £210.
Over a more extended period, flat prices have shown a more significant upward trend.
The last 10 years
In a recent 10-year period, UK house prices have increased by 73%, and flats are included in this statistic.
Slowdown in recent growth is mainly attributed to uncertain economic conditions. Interest rates have been high, for example.
The coming years
Experts expect flat prices to rise faster in the next few years.
You can also get customised information about the price growth of a specific flat.
Local estate agents or owners could tell you this, and online tools offer this.
Have flat prices gone down anywhere in the UK?
Yes. While flat prices have increased in most locations, there are a few exceptions over the past 12 months.
The south-east of England has seen the most noticeable drop in flat prices. There have been drops of at least 3% in:
- Canterbury
- Dover
- Ipswich
- Colchester.
The most affluent areas of London have struggled, as well. Major examples include:
- Chelsea
- Kensington
- Westminster.
There are almost no places in the north-west or north-east of England where flat prices have dropped.
The same can be said about Scotland and Wales.
Rental yield
Flat prices aren’t the only indicator of whether buying a flat is a good investment.
You can also investigate the ‘rental yield’ if you plan on renting it out.
Rental yield indicates how much rent a property brings as a percentage of its overall value.
For example, if a house valued at £100,000 brings in £7,000 per year, its rental yield is 7%.
The higher a flat’s rental yield, the more profitable it is. And this varies based on location, for example:
- London: 4.95%
- Aberdeen: 8.03%.
How to find out the rental yield for a specific area
You should investigate the rental yield in any area in which you’re considering buying a flat. This is useful if you ever rent it out.
Zoopla often publishes rental yields for each central town across the UK annually.
You could also calculate it on similar flats if you know the selling price and the average monthly rental price.
Local estate agents can also give you a strong idea of this number.
Considerations before investing
Location
Location makes a big difference to an investment’s value. Each postcode has a different return on investment (ROI).
When looking to invest in an area, research current and upcoming conditions there, from crime levels to infrastructure projects.
More local issues with regards to location matter, too. Different parts of cities and towns can have different average property values, based on their proximity to transport, general conditions, etc.
Type of flat
There are many different kinds of flats, including:
And more.
Furthermore, flats can sometimes be a part of large blocks of flats or smaller residential buildings. The latter are generally more attractive to buyers and renters. And even what floor the flat is on can make a difference to its value.
Condition
The condition of a flat is both a problem and an opportunity for investors. By buying flats in bad condition, you increase the profit potential.
However, bad conditions can mean several issues. Some of these might be quick and cheap to fix, others expensive.
Ownership status
Leasehold and freehold are the two most common ownership models for Uk property.
Flats are usually leasehold. This is not as valuable as freehold status. But as long as the lease is not short (i.e., under 80 years), it’s not usually a big problem for investors.
Other costs
You should prepare for the extra costs involved, including:
- Furniture
- Service charge
- Removal costs
- Lease extensions.
And more. So, make sure to budget carefully and prepare for a worst-case scenario.
Advantages of investing in a flat
Lower purchase price
Flats are one of the least expensive types of property on the market.
You don’t need as much money to invest in this area.
It’s an easier entry point, making it accessible to more people. It also constitutes a slightly smaller ‘risk’ for this exact reason.
Excellent track record of improving year-on-year
Flats in the UK have consistently gone up in value over the decades.
Most experts predict that this trend will continue for the foreseeable future. It’s often considered a safer investment.
The large rental market for flats
The flat rental market is enormous, especially in major cities and university towns.
It’s the most affordable type of rental, meaning millions of people live in this type of property.
Disadvantages of investing in a flat
Service charge and ground rent
Investing in a flat brings a few other expenses with it. Service charges and ground rent are the main examples.
These combined can often go above £2,000.
Other extra fees include paying a management company to look after the property if you choose.
It’s up to you whether you go down this route. Lease extensions and buying furniture are two more examples.
Inability to extend
Your hands are sometimes tied when you wish to develop the flat. It’s not always possible to extend it.
Especially if it’s part of a larger block and you are a leaseholder.
The local council can impose restrictions, as can the landlord. Existing covenants might be in place to prevent this, too.
It’s a significant issue that limits how much you can renovate and extend your flat.
Slowest price growth of all property types
Of all the property types in the UK, flats are currently experiencing the slowest growth.
Only a 0.1% increase recently occurred, far below the other house types.
This means that while your investment will increase, it could be at a slower rate. You should thus plan for the long term.
If you aim to sell the house in just a few years, your profit could be limited.
