10 reasons to buy a house rather than a flat .... EVERY time.

[Vanessa]

1. Houses are freehold, flats are generally leasehold.

2. Cash flow is better off a house than a flat, as flats/apartments have service charges that bite into cash flow.

3. You can extend a house, put on a conservatory, do a loft conversion, convert a garage into an extra room etc. You can not do any of that with a flat! All these things ADD VALUE.

4. Houses have gardens/useable outside space and storage. Flats are restricted on both fronts.

5. There is an over-supply of flats, and less and less houses being built, meaning that houses will be at a premium.

6. With more and more people working from home (a growing and long lasting trend), space is going to be an important consideration and houses can offer a home office in the garden or over a detached garage.

7. Flats are supported by the amateur investor market and first time buyers - meaning that they are very volatile with both rental and selling prices extremely fragile. Houses are supported by more sophisticated investors and family buyers, meaning that they have more stability in the market place.

8. Houses can be let in single occupancy or multi-let formats, giving you more flexibility and less chance of voids.

9. Houses open up your tenant market to families, house sharers, and therefore have wider appeal. Families do not tend to rent flats!

10. Mortgage products are more favourable for houses than flats on the LTV front, meaning lenders see houses as lower risk. That should tell you something!

[Vanessa]

Also, forgot to mention .... I've heard it reported several times that amateur investors are not paying their service charges because of the credit crunch or they are NMD buyers and can't afford to pay it. This means that blocks of flats are starting to deteriorate, communal areas being left uncleaned etc. As an individual owner, you have no control over this.

It's a downward spiral, because if maintenance and cleaning suffers, capital and rental values start to be compromised, and tenants do not want to rent there.

We have a variety of houses and flats in our portfolio and the houses outperform the flats on rental yields and occupancy .... EVERY time!

[REI]

My take. A bit of devil's advocate plus pointing out some holes in the logic presented by Vanessa.

1. Freehold vs. leasehold is just one aspect. Freehold is not automatically better. Focus on the numbers and the details.

2. A bad assumption. See the related forum discussion here

3. You can not make the changes suggested to most flats. You can make some changes to improve the value to many flats. Splitting a room, changing the layout, and some other things come to mind. Focusing on improving the value is a good ideas independent of if the property is a flat or house. Knowing the planning laws also matters as some houses can not be extended given prior changes or other restrictions.

The most cost effective changes are normally cosmetic so fresh paint and other things can be gold mines no matter what the property type is.

4. True. That is also why flats are less maintenance plus better for lock and go residents. #4 is mostly a style issue and not a reason why one will make a better investment over the other.

5. False as a general statement. False because all you need is one example to disprove the general case.

What is important is to understand supply and demand for housing in general in an area and for the specific type of housing being considered. There are many freehold homes in parts of the North that are hard to give away given demographic shifts. Not all cities have an oversupply of flats compared to demand. All about pricing and local conditions.

6. Home offices are important. That is why some folks looking for a flat want a 2 bedroom property and not a 1 bed. The idea that people working from home will focus on a shed or other room that has to be added is a giant leap. More likely is the case where people look for an extra bedroom.

The best work from home situations depends on good infrastructure. City centre can mean better or faster broadband. ADSL-2 is much more common in city centres. This will continue to change with time so the factors that are important will also change over time.

7. Further speculation. You can find a lot of flats that are owner occupied while you can find streets that are mostly all rentals even through they are freehold homes. What is important is the mix of owners. For the most part owner occupied areas are going to have more stable pricing. The specific type of construction or style matters less. What people want is what is most common in the area where they are looking. If you look in central London most people can not consider freehold homes so they look for flats. Period flats might be in higher demand in some areas. The top consideration for adults is normally the commute to work while families with children normally let the school choice dominate the location.

If you want to avoid areas with transient owners or tenants focus on the schools. Just expect that properties that are popular with the owner occupants are very likely to have worse cash-flow. Owner occupants will over pay compared to what an investor needs to see in terms of a return on the investment. Pride of ownership vs. yield. Owner occupants rarely could even calculate a yield or consider the local rent levels.

8. True but at a cost. If you go for a multi-let you need to upgrade the property to the HMO standards, you might have to pay for a license, weekly fire alarm tests are required once you hit the HMO specification and you are limited in your financing options.

Highest and best use is important. Just do not assume that taking a home and turning it into a multi-let is simple, easy or free money.

A flat is going to stay a flat. You might be able to turn a 1 bedroom into a 2 bedroom if one person uses the living space. Rarely will people who are thinking about a flat want to go that route. At best a 2 bedroom might be shared by 3 or 4 people if there is 1 or more couples.

High density use (HMO or otherwise) comes at an added cost as you get much higher wear and tear.

9. Families do rent flats if they have small children. Mostly of the time the family will have only 1 child and when number 2 comes along a switch to a larger property is the plan.

That said flat owners do benefit from not renting to families with children. Children can increase the wear and tear. Hence children is not always a positive in terms of a rental.

What should be noted is a family is much less likely to move. Once they are happy in a location there is much less reason to move the children to a new location unless forced by external circumstances.

10. The LTV levels for one type of property or another is not a good indicator of what makes sense. Just look back a few years. The LTV levels for flats were high and history has shown the lenders were not that good at predicting what would happen.

Be conservative in your use of debt. Make sure the properties will cash flow. If you can borrow more or less do not assume that the lender or the average LTV allowed is anything more than the lender's criteria. It says nothing useful about the possible success for the investment. Many homes and many flats are being repossessed. How and why that is taking place is best debated in another thread. Assume nothing about a flat based on the LTV a lender will allow.

Tangent: More deals where done off plan using flats because the construction period favored off-plan sales. That bias in the process is one reason why lenders have issues with LTVs on new build flats.

Conclusion?

The details of a particular deal and the investor's position matter the most. While people say and do things based on broad sweeping statements the reality can be very different. Similar to how we focus on the unemployment figure but not on the employed figure. 10% out of work implies 9 out of 10 people still working. Flats are today's whipping boy. More likely there will be a deal to be done on a flat if they are out of favor. Looking at the rents achieved in many cities someone still loves them.

John Corey
www.ChelseaPrivateEquity.com/blog

[nick tadd]

Interesting views.

I think both views have a valid point/s also holes as "sweeping statements" suffice it to say there are no 100% right reasons period, only the right reasons for the Landlord.

What anyone who reads this should take from it is that each one of the points above could be "torn apart" (if we wish to split hairs) but on the other hand if they suit your strategy then so-be-it.

The good news is that we have a choice.

Nick

[Gail]

My experience is not in line with yours Vanessa.

When we purchased our first ground floor flat 5 years ago it needed a lot of tlc and upgrading. A en suite was included in the upgrade and our first tenants (sharers) are still there. The garden is communal but it is not uncommon to see garden furniture outside the properties and there is outside storage for this furniture and other items. The maintenance charge (£200 p.a.) is a lot less than a gardener would cost. We have 2 other ground floor flats that have courtyard gardens with private access and these too are very popular and the service charges are very reasonable at £33 p.m. My experience is that tenants do not want to tend gardens and are not bothered too much about the outside appearance of their rented accommodation either.

With the detached houses purchased, we have had the gardens professionally landscaped with evergreen plants in low maintenance surroundings. The tenants in our houses range from sharers, professional couples and only occasionally families. We also pay service charges on several of these houses for communal area upkeep such as car parks and roadways.

When purchasing a flat we look for those that have a share of the freehold where possible but it is really the location and market demands that dictate. With the ever growing number of divorces there is a real need for accommodation for those newly single people too.

At a recent AGM it was reported that it was owner/occupiers who were the culprits not paying the maintenance charges not the landlords. Investors outnumbered the residents which makes me believe that investors do care about maintaining and safeguarding their investments. This has been further proved by my involvement in the management of a small block of flats. All flats are owned by absent landlords with varied portfolios from 2 to many and without exception all are actively participating in maintaining and improving the premises.

Although we have made many mistakes along the way, I am pleased to say that our varied portfolio is improving and hopefully so am I.




Vanessa said:

Also, forgot to mention .... I've heard it reported several times that amateur investors are not paying their service charges because of the credit crunch or they are NMD buyers and can't afford to pay it. This means that blocks of flats are starting to deteriorate, communal areas being left uncleaned etc. As an individual owner, you have no control over this.

It's a downward spiral, because if maintenance and cleaning suffers, capital and rental values start to be compromised, and tenants do not want to rent there.

We have a variety of houses and flats in our portfolio and the houses outperform the flats on rental yields and occupancy .... EVERY time!

[Vanessa]

It's great to hear different view points and experiences - makes for a good discussion! If it works for you, that's all that matters! If you have a variety of properties, then it probably spreads your risk too.

[REI]

Vanessa said:

It's great to hear different view points and experiences - makes for a good discussion! If it works for you, that's all that matters! If you have a variety of properties, then it probably spreads your risk too.

Vanessa,

I agree. A variety of opinions is good for a forum.

On the idea of spreading the risks.

Warren Buffett and others who are really wealthy down play diversification. Warren goes so far as to claim diversification is a marketing tool used by Wall Street to sell stuff to investors. Wealth comes from focus and concentration. A few eggs in a basket that you watch closely.

Put another way, the focus is the same as developing a skill and apply deep knowledge to an area. To become an expert and then make money by leveraging your expertise.

John Corey
www.ChelseaPrivateEquity.com/blog

[REI]

nick tadd said:

Interesting views.

I think both views have a valid point/s also holes as "sweeping statements" suffice it to say there are no 100% right reasons period, only the right reasons for the Landlord.

What anyone who reads this should take from it is that each one of the points above could be "torn apart" (if we wish to split hairs) but on the other hand if they suit your strategy then so-be-it.

The good news is that we have a choice.

Nick

Nick,

Spot on.

This is why I tell people to focus on each deal rather than macro level trends or broad definitions (flats vs homes). If the deal works the deal works. Take a long view in terms of ownership so cash-flow is the top factor.

John Corey
www.ChelseaPrivateEquity.com/blog

[Wasim]

Hi

Agree with Vanessa's original post and all the subsequent posts.

Also want to add to Point 5, the over supply of flats will mean that this type of prop will not recover as fast as the houses. My definition of over supply is based on the number of flats in Birmingham/Manchester city centre sitting empty. I went to see some flats not so long ago, when i asked the valuer to go out to get me some figures he told me that the apartments were buit over 3 years ago and these were still with the developer...he had been out to other flats in the development before.

I agree with alot of the comments regarding service charges and flats but some of the investors i have worked with have been highly geared, thought the prop market will always steam ahead and spent all their cashbacks from NMD's on porsches and ferrari's...lol i have a Q7, then doesnt count. These guys are the ones that are struggling now because instead of putting these funds aside to pay for shortfalls and service charges they spent the money, thinking that the next NMD will pay the shortfalls.

This works while the market is good, but cycle of borrowing money to pay shortfalls was always going to come crashing down.


I also think Freeholds are better as you are in complete control of your property and what happens to it...maybe im just a control freak.

The issue with people not paying the service charges should not really exist as if the Freeholder told your lender then your lender will pay the service charge and add the amount to the loan amount. They can do this as it part of the mortgage conditions. They do this as part of Service Charge is used to pay the buildings insurance on the prop...they are looking after their security.

Service charges and ground rents vary as well....i have friends who are paying £80 a month in service charges and £200 pa in ground rent. I know of investors paying £1500 service charge per apartment and then £75 everytime the tenant moves in..and before that they have to pay a one off fee of £150 if they are investors...its in their lease and the solicitor never picked it up or at the time the charges were tba as the Maintenance co had not been appointed.

Its all swings and roundabouts really but i always stress that Due Diligence is very important.

Regards

Wasim

[REI]

Sounds like a Ponzi scheme where the scheme operator was deceiving themselves. They want to do the next deal to cover the shortfall from the last deal. NMD works equally bad for any property type. If you get the numbers wrong it does not matter if it a new build flat, a Victorian terraced house or a SFR (detached). The deals was fiction.

Another label would be a house of cards. They come tumbling down eventually as you built up. The foundation is just too weak.

Wasim said:

Hi
This works while the market is good, but cycle of borrowing money to pay shortfalls was always going to come crashing down.


Wasim

[Marcus]

Wasim said:

The issue with people not paying the service charges should not really exist as if the Freeholder told your lender then your lender will pay the service charge and add the amount to the loan amount. They can do this as it part of the mortgage conditions. They do this as part of Service Charge is used to pay the buildings insurance on the prop...they are looking after their security.

That's interesting. What procedure would a freeholder have to follow to get outstanding services charges paid by a lender?

[Vanessa]

Interesting article. When buying flats, it is important to find one with a USP, good storage space, good living space, and good security. As this article suggests, identikit, "me too" apartments are not popular with tenants.

Cheap, uncheerful flats tick all the wrong boxes

New-build flats have many nicknames: yuppiedromes, euroboxes and, rudest of all, twat flats. Designed to maximise profit for developers and landlords, many are standing empty as, despite falling prices, buyers are scarce.

Earlier this summer, when we were first distracted by floating duck-houses and grandees somersaulting between first and second homes, another housing controversy quietly emerged. The National Housing Federation (NHF), the body representing housing associations, announced that its members would not, as widely predicted, be acquiring those surplus, vacant new-builds.

With waiting lists for social housing growing by the day, a ready-made supply of homes must have seemed like a blessing, but when the NHF inspected private residential developments, they found quality to be very poor. From a distance, city dovecotes (my suggested soubriquet) seem quite posh, but look again. Cheap brickwork, orange as fake tan, and grey external fittings typify many a buy-to-let investment hellhole. Occupants, many of them tenants, soon complained that the flats - with their gossamer-thin dividing walls - were like glorified cardboard boxes, but they were dismissed as whingers.

In Dovecote Towers, my former home, I could hear the man upstairs having a pee in his en suite bathroom. I worried about an enormous crack in the plaster that ran vertically up one wall, continuing into the flats above and below me. There was an overwhelming sense that one well-aimed sneeze would send the whole building tumbling down. And remember: prospective tenants can't ask for a survey.

Just before I vacated (escaped?), I discovered that a cowboy locksmith had ensured that front-door locks were child's play to lever open, while bathroom tiling collapsed after becoming a nursery for mould. Leaking flat roofs and faulty wiring are not unusual in these flats, and storage space is considered a luxury.

Architects are fond of fashionable orthodoxies, such as open-plan living. That's fine if you enjoy plentiful space, but tricky where up to four people must cook, eat, relax, study and dry laundry in one, cramped communal area. Recently completed two-beds have two bathrooms, but no utility room. Does some arcane bylaw stipulate that occupants need one bathroom apiece?

There is no legal minimum size for private homes. The average new UK flat is just 76 square metres - the smallest in the western world. My current flat would be considered quite high spec, but there is no corridor, so the bathroom opens on to the eating area (must I spell out why that's unpleasant when visitors stay?).

Tenants - the poor saps who pay rent - and many owner-occupiers loath new-build. Planners and housing associations disapprove, whereas landlords buy investment flats they might never see and which they wouldn't dream of living in themselves. Urban flats were needed to cover changing demographics and to stop our precious green belt being concreted over, but you might imagine that developers had been assailed by buy-to-let tenants pleading to be housed in tiny, flimsy euroboxes.

Private tenants envy their friends in social housing. I've seen urban council flats with generous lounges, drying cupboards, separate kitchens and even a box room - all for roughly two-thirds the rent I pay. To renovate modern private blocks until they are suitable for social use would require expensive remodelling, so the reluctance of housing associations to requisition or buy them is understandable, but why is private housing inferior to social housing?

Some brownfield sites have been landbanked by developers and are waiting, ready for when the buy-to-let market revives. So here's a crazy idea: when that upturn starts, how about building sturdy, attractive flats suitable for how we live now, rather than cursing us with shoddy, abominable dovecotes?

[Vanessa]

Very interesting article here from the BBC on this topic:

Financial shadow caused by city centre apartments ....

Grey, concrete, 16-storey Thames Tower is typical of the newly-built or renovated apartment blocks thrown up across cities in the UK in recent years.

It dominates the skyline on the northern tip of Leicester city centre, overlooking the inner ring road and the edge of the shopping district.

But it has cast a much darker shadow over its developers and the investors who chose to sign up for one of its 112 apartments which were being revamped during the property boom.

Contracts were signed for all but one of the apartments, but today only 14 have been bought and are occupied. The withdrawals caused the collapse of the developer, Brampton Asset Management (Leicester) Ltd.

Now the administrator could pursue these buyers through the courts for broken contracts - and the law says that they could be forced into completing the sale.

City living

The fashion for "city living" accommodation paints a picture of the UK housing market in recent years.

During the housing boom, developers were scrambling to build city-centre apartments and the new breed of buy-to-let investors were falling over themselves to buy them.

Prices of flats shot up, peaking at an average of £175,776 in January 2008 in England and Wales, according to the Land Registry.

But then prices plunged. By May 2009, the average flat was worth £141,565, when values were falling faster than any other type of property. From peak to trough, the price of a typical flat had fallen by £34,211, or 19.5%.

It was a nightmare for buy-to-let investors who saw they would lose in the short term, rather than gain, from their investments. The banks were also rationing mortgages, leaving some without the funds to buy even if they wanted to.

It proved to be bad timing for Thames Tower.

"Some people can't get a mortgage now whereas 18 months ago they were offered a mortgage left, right and centre," says administrator Chris Stirland, of Vantis Business Recovery Services.

LEGAL REMEDIES

Order of Specific Performance: An injunction to make a buyer perform his or her part of the contract and complete on the purchase agreement

Rescind the contract: The seller cancels the contract, keeps the deposit and retains the property in an attempt to resell it

Rescind the contract and sue: The seller goes to court to claim any unpaid deposit and then tries to resell

Damages: If successful, the buyer who pulls out pays the seller the difference between the contract price and the value at the date when completion should have taken place

One-by-one, some of the would-be buyers missed their completion date on the restored apartments with laminate floors and fitted kitchens. As a result, the bills built up for the developer which was expected to repay bank loans and pay contractors.

"It is unfortunate that the recession hit when these flats' contracts were due to be completed. If all the contracts had have gone through the indebtedness to the banks would have been paid off in full," says Mr Stirland.

"If the completion dates were six months earlier, all those people would have paid. Mortgage products were still in hand then. The bank and creditors would have been paid and it would have been a completely different story."

The developer collapsed and the administrator came in to restore as much money as possible for creditors. The apartment block, Mr Stirland says, remains a good prospect.

Some of this comes from ground rent and service charges from the existing residents, and new laws mean that no business rates on the empty offices at the base of the property, or council tax for the empty apartments, is being levied by the local authority.

But a key reason why the administrator does not have to accept a quick sale - despite interest from at least 30 different parties - is the £100,000 income coming in from renting out the roof of the 190ft tower for telecommunication masts, such as mobile phone masts. The leases expire in 2019 and 2020.

But the administrator has also written to all those who have signed contracts and are yet to complete.

Mr Stirland says he wants to come to an amicable arrangement with them all, which could include completing or rescinding the contract and losing their deposit of about 10%.

However, while the financial benefits are obvious for the creditors, the would-be buyers could face legal action.

"You have a developer who has potentially lost out, and you have some contractors who were dependant on the developer getting paid," says Mr Stirland.

"You are affecting the lives of quite a few people, so you have to marry that with one or two individuals who wanted to make a profit and have been unlucky in the timing of their investment."

More and more of these cases are being heard in the courts, where profit-chasing buy-to-let investors are getting stricter treatment than homeowners during the recession of the early-90s, according to Jeremy Raj, head of residential property at City law firm Wedlake Bell.

Unlike most house buyers, buy-to-let investors have tended to exchange contracts and pay their deposit off-plan when apartments were being built.

That meant there was an unusually long wait before completion and payment in full - a period in which the downturn hit mortgage availability and house prices.


Some of the decisions might be regarded in decades to come in the same way as we look at some of the blocks that blighted city centres in the 60s and 70s

But instead of just taking the deposit and selling the apartment to somebody else, some developers are seeking orders requiring "hundreds" of customers to keep to the contract and buy the apartments.

"There is a worryingly widespread and entrenched belief among buy-to-let investors that if they decide to withdraw from a purchase for which they have exchanged contracts, that only their deposit is at risk," says Mr Raj.

"The legal position is quite clear. They are legally obliged to complete on the transaction.

"Damages are not even restricted to the difference between today's market price for that property and the price they contracted to purchase at."

The legal term of this process of forced purchase is an order for "specific performance" - an injunction granted by a court which has fairly broad discretion.

Boom and bust

The buy-to-let boom and bust epitomises the rise and fall of the housing market in the last decade.

There is a chance that empty city-centre apartment blocks will be the legacy, not just economically but socially and architecturally too.

Jules Brown, planning co-ordinator for the North of England Civic Trust, says developments in cities such as Leeds and Newcastle might show that we have failed to learn from previous mistakes.

"They went up very quickly, and some of the decisions might be regarded in decades to come in the same way as we look at some of the blocks that blighted city centres in the 60s and 70s," he says.

"In a generation, we might ask what an earth were we doing."

Mr Brown says that the market will decide whether it will also be considered as a financial mistake as well. He says that prices will show if the "pile them high and sell them cheap" approach has led to an oversupply.

Jeremy Leaf, housing spokesman for the Royal Institution for Chartered Surveyors, says that - similar to the rest of the housing market - a shortage of the right flats in the right areas had meant prices had started to rise again since May.

Yet alternative uses were trying to be found for those flats - often on cheaper land - that nobody wanted to move into.

Back in Leicester, and the recession has not completely stopped the construction of new apartments in the city.

One example is the new Phoenix Square development in the city's cultural quarter, with cinemas in the basement and "individual" eco-friendly apartments upstairs.

Its location makes Peter Connolly, the complex's development director, confident that the apartments - selling at between £71,000 and £210,000 - will all be full in a year.