Should you invest in a flat or a house? There’s no single, fool-proof way to choose the right investment, but new research looks at the top property types.
The type of property you invest in may depend on your circumstances, budget, ideal return goals or what you plan to do with it and which tenant type you intend to target. Location will be a major part of the decision-making process, too.
For the most part, the UK housing market is something to be entered into for the long term, as this is how you will maximise your capital growth. It is also important to try and choose a ‘futureproof’ investment by paying attention to trends, outlooks and any future changes that could affect your investment.
This is one of the reasons why investing in a flat can be one of the best ways to secure the highest returns in the current market. Energy efficiency is a huge topic right now, particularly in the rental sector, and flats – particularly new-builds – are generally cheaper to run than houses.
Another factor, though, which was pointed out in a recent report from Hamptons, is the fact that yields can be much higher on a flat than on a house. You can read more about why yields should be a key focus of your investment planning here.
Choose a flat for higher yields
Of course, the UK housing market is vast and varied, so the specific location or project in which you invest will always play a major role in the final outcome of your investment. But on a general level, a flat will bring in an average yield of 7.1%, says Hamptons, compared with 6% for a house.
Hamptons’ report also points out that the number of bedrooms your property has will not necessarily translate into higher rents, so choosing a four-bedroom house over a one-bedroom flat is unlikely to improve your returns.
The report adds: “The cost of extra space such as storage and gardens doesn’t necessarily contribute much to the yield.
“On the other hand, most lenders take into account service charges and ground rents for flats, which can eat into the profit. The average annual service charge climbed £100 this year to £1,840.”
A further reason a flat may be more successful than a house is down to a combination of the cost of living crisis pushing people to pay closer attention to their outgoings. This relates to living in a smaller property, such as a flat, as well as spending less on bills, so opting for a more energy efficient home.
Newer properties are more enticing
Hamptons notes that in 2022, the average new-build one-bedroom flat brought in 13% more rent than an equivalent older property within the same postcode. When looking at rental costs for two-bedroom flats, this increases to 15%.
So, while new-builds are generally more expensive to buy, the figures demonstrate that the increased rental amount, as well as their greater desirability in the current climate, can pay off.
In reference to the enhanced energy efficiency of new-builds over older homes, Hamptons writes: “With the government potentially set to introduce legislation that requires privately rented homes to be EPC band C by 2025, energy efficiency is moving onto landlords’ radars.
“A record 58% of EPCs carried out in all privately rented homes in 2022 were rated A-C, up from 32% five years ago.
“While new-build homes command a premium over older rental stock, 96% of new builds fall into EPC bands A-C, meaning investors would not have to pay for improvement costs. Maintenance and running costs are likely to be lower too.
“The Home Builders Federation (HBF) estimates it would cost over £70k to upgrade an older three-bed semi-detached home with all the features of a new build.”
