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Original poster

Would I be completely mad to consider buying a studio flat?

24 replies

franke · 30/08/2010 09:41

I've found one I can afford in a beautiful period building, leashold with a share of freehold. I want to buy it, do it up and rent it out. The yield will be far better than what I'm currently getting in the bank. This would be a long term investment - I don't intend to sell anytime soon. The flat is in a quiet, slightly depressed town. Am I mad to even consider it? Am I being bedazzled by the fact that I can afford it?

OP posts:

belgo · 30/08/2010 09:45

Why not?

Property is a generally a good investment, as long as you can afford it and don't just end up with another huge mortgage or loans from doing it up.

MollysChambers · 30/08/2010 09:45

Depends on your attitude to risk I suppose. Property definitely a longer term investment at the moment. And renting out can be a hassle. I wouldn't do it but then I am completely risk adverse.....

Original poster

franke · 30/08/2010 09:56

I suppose it's the fact that it's a studio that making me think a bit. It limits my eventual market for resale (probably not mortgageable at the mo). I could stretch to a one bed flat but not in as nice an area, hell I could buy a whole house in Derby! I'm quite risk averse too Mollys, but that's why my savings are in a bank account earning all of 0.5% at the moment.

OP posts:

MollysChambers · 30/08/2010 13:38

moneysavingexpert.co.uk. Martin is fab. He'll tell you where to put your money for a higher return!

Quattrocento · 30/08/2010 13:46

I've got a buy-to-let investment and tbh I wish I hadn't ...

The problems I've encountered are:

Tenants who don't pay because they got into financial difficulty themselves

Void periods - where there are no tenants

Resale issues - if the city you are proposing to buy the flat in doesn't have a strong flat-dwelling tradition (ie pretty well anywhere other than London or Edinburgh) then resale is harder

Issue with a retaining wall

Hard work finding tenants and redecorating and making sure repairs are done

I don't know how much I've lost on this investment but it's probably around £50k.

Up to you, but why not look at the stock market instead?

expatinscotland · 30/08/2010 13:48

The yield might not be better. In fact, it might be zero or you might even lose money.

WhatsWrongWithYou · 30/08/2010 13:51

Or would a holiday let be a better option?

Can't speak from experience but I'd be curious as to whether anyone recommends it as DH brings it up as a possibility from time to time.

Quattrocento · 30/08/2010 13:56

The good thing about having a holiday letting property in the UK (it does have to be in the UK) is that any losses you make on the property can be offset against your taxable income in the UK.

The problem with holiday lettings is that you have to be there for the changeovers or employ someone to be there for the changeovers. Which are either weekly or fortnightly for holiday lets so a bit of a pain tbh. I thought it'd be a good option for people who live in a holiday location though.

ISNT · 30/08/2010 14:01

Do you know that there is a demand for studio flats in that area? Have you done your research?

WhatsWrongWithYou · 30/08/2010 14:01

That's a good point Quattro; do holiday lettings agents provide that service (I'm sure it would be expensive if they did).

Mooos · 30/08/2010 14:07

Franke what's going to happen when interest rates return to 8%+ ? I remember when mortgage rates were 14%.

Dangerous.

Quattrocento · 30/08/2010 14:08

Yes they do but yes, it is expensive. Didn't research this properly - so please treat with care - but was told that it's around 25%-30% of the rental income with ancillary expenses such as cleaning etc on top!

nancydrewrocked · 30/08/2010 14:16

Historically over the long term property has done no better than the stock market. Although many people prefer having something tangiable to show for their investment.

As a reluctant landlord I would be hesitant at recommending it as a sound investment and you certainly cannot rely on it month by month or even year by year to provide an appropriate level of return.

ISNT · 30/08/2010 14:45

Don't forget to add the appreciation on teh property in on top of the rent you are receiving! When i did my sums i calculated that I had done just about as well as saving the same amount of money in terms of the return ie rent, but I completely forgot to factor in that the property value was increasing as well.

You're probably not as dim as me though!

Mine is super-long term - I plan to keep it as somewhere for the kids to go when they want to move out (if they want to stay local) and beyind that to inherit. Unless I change my mind in the meantime anyway! they have just changed the capital gains tax rules so that i would get clobbered if I sold it now anyway...

Mooos · 30/08/2010 15:26

I don't think "property" is going to appreciate for 10-20 years (thank goodness). We need to let our children hope they can buy their homes.

Have a look at www.housepricecrash.co.uk for some good information.

PS I have no vested interest other than hoping that our children will one day be able to afford their own homes. At the moment that is impossible.

Earlybird · 30/08/2010 15:33

Agree with suggestion to make sure you do your research.

Check into rentals market for studios in the area -
How much is comparable rent for studio in the area?

Who is your 'target tenant'?

Would you hire a management firm to find/vet potential tenants?

How will you handle repairs/maintenance?

Would you rent furnished or unfurnished?
How much is the service charge in the building?
Could you handle mortgage/service charges during void periods?

expatinscotland · 30/08/2010 15:38

'Yes they do but yes, it is expensive. Didn't research this properly - so please treat with care - but was told that it's around 25%-30% of the rental income with ancillary expenses such as cleaning etc on top!'

And if your holiday home is on a site, you'll also need to think about site fees and if the holiday site is year-round.

EdgarAllInPink · 30/08/2010 15:57

to highlight how much of a problem service/ repair charges can be -

I know a good few people who were charged 4-figure sums for repair works that never took place (or shouldn't have cost anything like that) - and some that took the holder of the ground rent to court to avoid paying them ...

definitely a case of Caveat Emptor.

when we looked into it, a flat in our area would lose a months rent just on the regular yearly ground rent - before anything other overheads were considered.

Quattrocento · 30/08/2010 18:36

What goes up also comes down, ISNT. I've factored in the property appreciation (which actually has been depreciation over the previous three years).

Earlybird · 30/08/2010 18:41

I'd also get information about any assessments made of building owners. Is there any sort of 'sinking fund' that exists for large repairs?

Check into how well the building has been maintained - you don't want to get 'sunk' by a big bill for your share of a new roof, etc.

Earlybird · 30/08/2010 18:41

Sorry - that should read 'assessments made of flat owners in the building'.

ISNT · 30/08/2010 18:46

Yes I'm sure you have quattro I was thinking of the OP! It was quite a basic bungle that I made with my figures and wanted to remind her to think about it - whether it might appreciate or indeed depreciate.

Original poster

franke · 30/08/2010 21:17

Thanks all. This has given me a lot to think about. I think the investment is do-able, just not sure if I'm the one to do it in the end tbh.

OP posts:

Eurostar · 31/08/2010 22:18

Bank of England interest rates are at the lowest they have EVER been in England. Don't do your calculations based on current rates!!

A few questions to start...

What is the cost of the flat?
How much is your deposit?
What % of the service charge will you be paying?
What are average rents in the area for studios?
How many studios are currently showing available for rent on the main property websites/gumtree? (I would definitely suggest posing as a potential renter of a studio in the area to see the range of properties you are offered and the "real" story as to how much discount might be available on advertised prices)
What effect will the upcoming housing benefit changes have on the rates of studios in the area?
What if you need access to the cash for other reasons at a later date? Studios are notoriously hard to sell during downturns.

Also, given that governments are going to be looking for more possible sources for tax in the future with the massive debt to pay off, buy to let is looking a good option for new taxes - in 5 years it could be a more highly taxed investment - hard to predict your future income stream as it may become more highly taxed. As for possible capital gains if prices do rise....capital gains currently low on property and easy to evade altogether if you claim it as your main residence for 6 months before sale, however, expect this to all tighten up and become more stringent over the next ten years.

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