What type of property should I invest in?

There are a number of different property types to invest in. I am going to classify them as:

a)    New build Flats
b)    Off-plan flats
c)    Re-sale/existing property
d)    Houses in Multiple Occupation
e)    Commercial Property

The first three property types are the most common. The most popular type of rental property is a 2 bedroom flat or house.

a)    New Build Flats.

The advantages:

-    No repairs. There may be some minor snagging but new build property comes almost ready to go. You may have to fit some carpets, curtains and fittings but you will have 10 year guarantee and very few problems.

-    Some new build flat developments come with discounts and rent guarantees (however be careful with these – see below).

The disadvantages:

-    Many flats becoming available to let at the same time. Some developments of flats can have up to 50% to let. This will drive down rents and puts tenants in a commanding position.

-    Lower yields than established/resale property. New flats tend to be more expensive and smaller than resale property. This makes the return smaller.

-    If the rents are driven down then landlords are facing making a loss even if their flats are rented.

-    Some discounts are not real. Some developers will increase a price and then state that there is a discount. This can also be the same with rent guarantees, often just added to the price.

-    Some city centres have a glut of flats. When there is a glut this suppresses growth and rents – Manchester city flats is a good example of this. One report stated recently that one in every three flats in central Manchester is empty.

-    Annual maintenance charges. These are quite high to begin with and tend to grow at an alarming rate each year. I purchased a new build flat in Cardiff bay in 2002. The annual service charge was £650 per year. The 2008 service charge is now £1,366. This is an eye-watering increase of over 100% or 17% per year. The freeholder just seems to make up a figure with no rationale and charge it to me. This same freeholder also had the cheek last year to send me a further request for £200 to paint the hallways – I strongly advised them that they were taking the ‘mick’ and I haven’t heard back from them on that matter (I shall get off my pedestal now!).

b)    Off-plan flats

The advantages:

-    Potential for capital growth before the property is purchased. This can be up to two years.

-    Getting in early gets the best deal from developers. They need early buyers to secure finance from the banks for the project so will offer the best deals off-plan.

The disadvantages:

-    Sometimes difficult to visualise the development and what the specification is going to be.

-    Deposit normally paid up to two years before completion.

-    Other disadvantages as new build flats (above).

c)    Re-sale/existing property

The advantages:

-    Cheaper property than new build

-    Good rental demand (as long as area is OK)

-    Better yields/returns that new build

-    Normally capital growth much higher than new build

The disadvantages:

-    More repairs

-    Areas sometimes not as good as new build property

-    Higher proportion of Housing Benefit tenants

d)    Houses in Multiple Occupation/HMOs – (link to chapter on HMOs)

The advantages:

-    Good yields/returns

The disadvantages:

-    HMO regulations – can be costly to convert

-    Only professional tenant HMOs work well

-    Multiple tenancy agreements – a lot more paperwork

-    Very few letting agents prepared/capable of managing HMOs

e)    Commercial Property

The advantages:

-    Long term leases

-    FRI leases – tenant repairs and insures property

-    Very quick eviction of tenants not paying

The disadvantages:

-    Takes longer to get tenanted than residential

-    Higher deposit needed

-    Capital growth lower than residential