Date Published 18 November 2016
A question we get asked a lot by our investor clients, certainly from those new to investing, is whether to buy a house or a flat as an investment to rent out and which would offer the best return.
There are two strands to this question. Are you looking for the maximum rental income each month or growth when you come to sell; or perhaps both. One of my biggest landlords always buys with the maximum rental income in mind and will even consider houses in multi occupation where the risk is greater and the returns better.
Let us take a look at a flat as an investment first. We will use properties in Steeple View, Basildon for the purposes of our examples.
A flat in Walnut Close has just come on the market for £200,000. Now this flat would rent out for £850 a month, however, with all leasehold properties, there are management charges to take into account. These are typically £100 per month to include ground rent.
Two bedroom flat in Walnut Close
Purchase price £200,000
Stamp duty to pay £7500
Typical solicitor costs £1200
Rental value per year £10,200
Management Charge £1200
Typical profit £9000
Yield 4.5%
Profit over a ten year period £81,300
Property price increase over 30% increase
ten years (predicted) £260,000
Profit if sold after ten years £132,600
Two bedroom house in Ellswood, Steeple View
Purchase price £285,000
Stamp duty to pay £12,800
Typical solicitor costs £1200
Rental value per year £12000
Typical profit £12000
Yield 4.21%
Profit over a ten year period £120,000
Property price increase over a 38%
Ten year period £393,300
Profit if sold after ten years £214,300
For this example, I have made some assumptions, mainly that there are no mortgages on either property, the property is managed by the landlord, there are no repair issues and these figures do not include a predicated cost of solicitor fees for selling in ten year's time.
As you can see that although the initial purchase of the freehold property is greater, the rewards financially far outweigh those of a leasehold. This is for two reasons, firstly the capital growth would be higher and there are no management charges to be paid with the freehold property.
