With urbanisation taking place across major UK cities and a third of millennials now expected to live in a rental property their entire lives, the rental property market is booming. But what type of property should you invest in?
Post-pandemic, renters are expecting more than ever from their homes due to new lifestyle trends – prime city centre residential areas, bright modern spaces and a range of amenities. Delivering on these demands, purpose-built or ‘build-to-rent’ apartments are the city centre home of choice for millions of renters across the UK.
This short guide will explore the advantages and disadvantages of investing in purpose-built apartments, comparing the investment to buying a house, and outlining key considerations to answer the question – is buying an apartment a good investment?
Apartments vs. Houses for Investments
In the residential market, the two most common investment property types are houses and apartments. While there are pros and possible cons to investing in both as we’ll explore the key differences in this guide, choosing a good investment largely depends on the individual’s preferences, financial goals, and the level of hands-on involvement they’re looking for.
Historically, buy-to-let apartments were associated with cramped spaces in unattractive high-rise blocks with little or no facilities, attracting lower-income tenants. Today, there is a huge market for purpose-built apartments (developments designed and built for the end-user experience), making them a high demand, lucrative investment property. Typically in prime city centres due to their height and therefore housing density, apartments offer the prime location and accessibility potential tenants are looking for.
But how do apartments compare today with investing in a house?
The two most popular types of house investments are Houses of Multiple Occupancy (HMO), which are typically terraced houses in suburban areas converted into shared accommodation to house professionals or students; and Buy-to-Let houses which typically attract families or young couples.
Ironically, HMOs have taken on the outdated reputation apartments are now outgrowing – cramped, poorly designed and less desirable. Of course, this isn’t always the case, and many investors enjoy consistent returns from house investments.
The advantages of investing in an apartment vs. investing in a house
In this section we will look into the advantages of investing in each property type, followed by exploring any potential disadvantages or considerations in the next section.
Advantages of investing in an apartment
There are many advantages of buying an apartment when doing so for investment purposes, such as:
- Apartments are usually cheaper to buy than houses as they are considerably smaller in size, making them a great option for first-time property owners looking to enter the housing market
- Apartments typically drive higher returns than houses due to their lower capital entry point and high demand
- Purpose-built apartments are the city centre home of choice for millions of renters today, due to their prime central locations, modern interiors, and range of amenities
- Despite the increasing demand for rental property, supply is still comparatively low. This supply and demand imbalance drives strong and consistent yields for investors
- As purpose-built apartments tend to be newer (especially when buying off plan), they are less likely to require replacements, and therefore have lower maintenance costs than traditional buy-to-let houses which are typically terraced houses in suburban areas
- Purpose-built apartment buildings are usually managed by an on-site team of professionals with a 24-hour concierge and security service – removing the duty-of-care pressure on investors
- When you buy an apartment, you usually buy it as a leasehold property and are unlikely to be the freehold owner. This is an advantage for investors looking for more of a hands-off, hassle-free investment as they aren’t responsible for external maintenance and communal areas
- There is the opportunity to buy apartments in bulk, or diversify your portfolio by buying apartments in different cities
Advantages of investing in a house:
- You are likely to be the freehold owner and therefore have more control and freedom with regards to modifications such as conservatories or extensions to increase the property value with the correct planning permission
- Houses typically offer more living space, better parking and a garden – appealing to families with children and pets
- Longer-term tenancies are more common as families want to feel settled in one place
- Capital growth is more predictable with houses based on historical data, but as most purpose-built apartments are sold off plan, projected growth over the build period is usually accurate
Considerations of investing in an apartment vs. investing in a house
Considerations of investing in an apartment:
- Ground rent and service charges can be higher than expected, so it is important to discuss this thoroughly with your property consultant to set realistic expectations
- It isn’t possible to increase an apartment’s size through an extension or conservatory, both of which add value to an investment property
- It is also more difficult to modify inside as knocking walls and moving or adding bathrooms needs to be approved by the freeholder. However, with purpose-built apartments it is unlikely that there would be a need for this as they are new and designed with the end user in mind
- Apartments typically have a higher turnover than houses as families tend to settle for longer, but city centre apartments have few void periods due to high demand
Considerations of investing in a house:
- Houses are more expensive and therefore require a higher capital entry point than apartments. Unless the house is brand new, there is nearly always start-up costs such as refurbishment and installation of white goods and appliances
- If you’re converting a house into a HMO, there are many unexpected costs involved and a longer timeframe
- If you choose to furnish the property to increase your rental yield (by up to 21%), it is much more expensive to furnish a full house rather than an apartment
- The rental yield on a house is likely to be lower, due to them being more expensive to buy and lacking the prime central location and amenities in high demand today
- A house requires more maintenance and hands-on involvement. As the freeholder you are responsible for all replacements and repairs, as well as the maintenance of the garden. The landlord would either have to manage the property themselves (not suitable for overseas investors), or pay a management company
Is Buying an Apartment a Good Property Investment?
There are certainly more advantages and less considerations when buying an apartment. However, when it comes to property investment, it isn’t a one size fits all approach.
Whether it’s the right investment for you largely depends on your financial goals, budget, target market and property preferences. Within your financial goals you should have an idea of how much money you can invest, over what period and when you need a return on your investment.
That’s why every investment should start with a conversation with a property consultant. They’ll help you establish these factors and show you relevant options based on your preferences. Reputable developers will be able to provide you with accurate growth projections and predicted rental yields based on market research and their strong track record.
Generally, apartments offer a lower capital entry point, higher yields and more of a hands-off, hassle-free investment. For investors that prefer more involvement in renovation and management of the property, and are perhaps looking for more mature tenants and families, houses might be the best option.
Across all asset classes, portfolio diversification is important to maximise returns and minimise risk. Whether you invest in multiple locations, across different sectors (student and residential), or whether you invest in a mix of houses and apartments to see which performs best for you, diversification is key when it comes to obtaining financial freedom.
Article supplied by Select Property Group, a nationwide company who build, sell and manage purpose-built apartments in the UK’s highest performing regional cities with latest opportunities in investment hotspots such as Birmingham and Manchester.