Do flats make good investments?
We buy and sell flats, but we do not buy and hold them. Aside from the many costly problems we've seen with leasehold properties, there are other reasons to avoid flats.
In my email inbox today I received an offer for a one bedroom flat with a 7.6% yield. Of course, there was no mention of construction quality, if the area is becoming saturated with landlords or what the management company was like, but then that sort of information probably wouldn't help their marketing!
Here are the figures.
Now, let's make a few assumptions for year one:
Taking the above into account, the actual take home cash for the investor would be £2,754 per year, obviously if interest rates went up this could be significantly lower. On rental income alone it would take more than 10 years to get the mortgage deposit back and if the boiler breaks the investor has lost a years wages!
The flat was a new build (don't get me started on the issues there) and it was fully decorated so has no way to add considerable value and get money out to fund the next purchase.
If there is a major downturn in the economy there may not be much (or any) capital appreciation and a rise in interest rates could mean the investment loses money each month. The 2007/08 crash meant that countless investors are left with flats which are worth less than they purchased them for almost a decade ago and have no real profits to show for it.
A better alternative
People are drawn to flats because they're cheap. Let's assume the above investment required a deposit of £22,500 (25%). We would argue that it's better to simply wait until you have a larger deposit and invest properly - for life changing income.
Once again, let's look at the figures from one of our recent (standard) investments.
The deposit required is more than in the last example but the lifelong returns are significant. The house will make 7 times as much money as the flat! This large monthly income protects against unforeseen expenses and provides life changing income.
Take a look at some other things we do differently.