#9: Flats versus houses for landlord investments


This week’s episode of Good Landlording discusses one of the first questions that landlords ask themselves when they’re looking for a buy to let: should they buy a flat or a house?

Richard and Suzanne go through the pros and cons of both flats and houses, drawing on their own experiences as landlords, with Suzanne only now investing in houses, and Richard having only ever bought flats as rental investments. 

Suzanne explains the difference between “leasehold” and “freehold”, service charge, ground rent, and practicalities, before going through what the new Leasehold and Freehold Reform Act 2024 promises to bring now it is on the statute book.

houses versus flats as landlord investments

What’s the difference between leasehold and freehold?

For leasehold properties such as flats and some houses, the building itself  and/or the land it sits on are owned by someone else called the “freeholder”. The freeholder may be the original developer,  or, they might have sold it onto another company.

Each leaseholder enters into a lease with the freeholder to own the flat or leasehold house for a fixed period of time.  And so this is currently typically 99 years or 125 years for residential properties.  The length of the lease decreases each year until it eventually runs out, unless the parties agree to extend the lease.  A lease is therfore an asset that will that goes down in value the closer it gets to the end of the term. 

When someone buys a flat, the leaseholder transfers the lease agreement to the new owner. This is called “assignment”, and the freeholder is likely to need to give consent to the assignment.  And during the the lease agreement, the term of the lease, the leaseholder pays ground rent  and a service charge to pay for repairs and maintenance. 

A leaseholder is a long-term tenant, and a freeholder is a type of landlord. However, to avoid confusion, it is good practice to use the word “leaseholder” to refer to somebody who holds a long term lease, and keep the word “tenant” for someone who has a a tenancy agreement with a landlord.

When someone buys a lease, they pay a “premium” for the lease, which is an upfront payment for the right to occupy the property for the term of the lease.

Ground rent and when it becomes a problem

Leaseholders also pay ground rent, which may be a “peppercorn” (a nominal amount which the freeholder does not collect), or a more substantial sum. Over the last few decades, some developers and freeholders have seen ground rent as a profit centre, and have included onerous ground rent clauses into their leases, which increase over time. Sometimes ground rent doubles every 10, 15, 20 or 25 years.

Onerous ground rent provisions are a big problem as many mortgage companies refuse to lend money on properties which have them. Ground rent above a peppercorn was abolished for new leases a few years ago, and it was supposed to be restricted in the Leasehold and Freehold Reform Act, but it got dropped at the last moment, when the election was called. 

>> Blog post: The Independent Landlord – The latest news on the reform of ground rent

What does it mean when a flat owner has a share of the freehold?

Sometimes the owners of flats in a building (who are leaseholders) club together and set up a company to buy the freehold, which the flat owners have shares in. These leaseholders are said to have a “share of the freehold” in addition to their lease.

However, do be careful, as some leaseholders with a share of the freehold still have to pay service charges (or estate charges) to the freeholder of the estate as they receive services from the estate, eg gardening, parking.

It’s less of an issue when flat owners in (say) a conversion of a Victorian house, jointly own the freehold of the building. They set up a management company and agree on all the repairs. They have a sinking fund, maintain the common parts, and comply with all the fire safety rules. 

Service charge – top tips for leaseholders

Service charges are an area of risk for leaseholders as they currently have little control over the service charges. It can be difficult to get information from the management company that acts on behalf of the freeholder for the development. 

Service charges for large blocks of new build flats tend to be high, particularly if they have added services like concierge facilities, gyms and swimming pools. It is the landlord who pays the service charges, and not the tenant, so a sudden hike in the service charge can hit the bottom line for landlords.

It’s important to have a good look at the accounts before buying a leasehold property to see what works have been carried out and how big the sinking charge is. The service charge will be higher for flats with lifts as they are expensive to repair.

In some cases, service charges can make an investment uneconomic.  And in other cases,  they are fair. Duee diligence is key. For instance, asking to see what invoices have been paid, and how big the sinking fund is. See if it’s likely that the windows will need replacing soon or whether any other big repairs are needed.

The advantages of flats as investments for landlords

Here are some advantages for landlords when they buy flats:

  • Flats are usually less expensive to buy than houses, and it can be possible to get good deals if landlords buy more than one in a development.
  • Flats tend to be more central, in towns and cities that attract young professionals, especially if they’re near a hospital or a university.
  • If there is good management, it saves the landlord from doing repairs to the common parts and the exterior.
  • The capital cost for major workers are spread evenly over time if it’s well managed  and, the cost will be shared among the development. 
  • They are more secure during voids.
  • A flat in a well-run block can be a more “hands-off” investment than a house
  • It’s likely to become cheaper and easier to extend leases to 990 years or buy a share of the freehold when the Leasehold and Freehold Reform Act 2024 comes into force.

The downsides of flats as investments for landlords?

Here are some disadvantages of flats:

  • Some management companies charge excessively for documents and consents, and take commission from insurance brokers.
  • There are often restrictions in leases which means it can be more difficult to extend or change the configuration.
  • Having a rental property in a block can be difficult if the neighbours are noisy.

The advantages of freehold houses as investments for landlords

Here are some of the reasons in favour of freehold houses as investments for landlords:

  • Houses tend attract long term tenants, especially if they have a garden and off-street parking, which reduces the costs associated with voids.
  • Although landlords are responsible for all repairs for houses, unlike flats, if a landlord refurbishes a house properly at the start, there is less likelihood that things will go wrong and need emergency repair.
  • The owner of a freehold house makes the decisions about when to make improvements.
  • Landlords need to take out landlord insurance if they own the freehold of a property. That said, they will be able to choose the exact cover and will not be paying the managing agent of the freeholder to arrange it.
  • Owners of freehold properties are in control of capital expenditure, and can decide when to do major upgrades such as replacing windows.
  • It’s relatively easy to add value to a freehold house by extending it, subject to planning permission.

What makes a good house for landlords?

Here are some of the reasons in favour of freehold houses as investments for landlords:

  • Houses tent attract long term tenants, especially if they have a garden and off-street parking.
  • Although landlords are responsible for all repairs for houses, unlike flats, if a landlord refurbishes a house properly at the start, there is less likelihood that things will go wrong and need emergency repair.
  • The owner of a freehold house makes the decisions about when to make improvements.
  • Landlords need to take out landlord insurance if they own the freehold of a property. That said, they will be able to choose the exact cover and will not be paying the managing agent of the freeholder to arrange it.
  • Owners of freehold properties are in control of capital expenditure, and can decide when to do major upgrades such as replacing windows.
  • It’s relatively easy to add value to a freehold house by extending it, subject to planning permission.

What makes a good flat for landlords to let?

Richard has a number of flats, and prefers small conversions to new build blocks of flats. He avoids blocks with cladding and/or lifts.

From a location point of view, it’s good for them to be in the centres of towns and cities, within easy reach of public transport.

Golden nugget

Leasehold law is changing a lot at the moment with the leasehold-friendly Leasehold and Freehold Reform Act 2024 due to come into force in 2025/26. Both Labour and the Conservatives see this Act as a start, and plan to continue leasehold reform if they win the election.

Some of the issues associated with owning leasehold property may improve as a result, with more scrutiny of the managing agents, of accounts,  and even the regulation of property agents.

It may be cheaper and easier to extend short leases, which is an opportunity for the adventurous.

>> Related episode: GL #2: How to select good tenants

>> Blog post: The Independent Landlord – Are houses or flats better buy to let investments?

Credits

Music: “Paradise Found” by Kevin MacLeod of Incompetech. Licensed under Creative Commons: Attribution 4.0 License.

flats versus houses for landlord investments

4 thoughts on “#9: Flats versus houses for landlord investments”

      1. Great. You can always caveat it by saying that your podcast is so nimble that topics can change. i.e I can see an emergency podcast replacing the usual one as soon as the manifestos are out!!!

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