Please note: This is Chapter 1 in the Complete Guide to Property Investment Strategies, focussing on Single Lets.
The aim of this chapter is to equip you with the knowledge around investing in Single Lets and where it sits on the TKM Triangle so you can assess whether such a strategy is for you. (Hint: it suits everyone).
Single Let Definition
Let’s start with a simple definition:
A single let is a residential property let on a single Assured Shorthold Tenancy Agreement (AST).
Typically this would be 1-3 bedroom flats and houses let to single occupiers, couples or families. Single Lets are the most straight-forward of property investment strategies and where everyone should begin.
Single Lets: Advantages and Disadvantages
As you might imagine, the main advantage of such investments is the simplicity.
Advantages of Single Lets
- Easiest to understand.
- Easiest to manage.
- Consistent and stable rental demand, virtually countrywide.
- Reliable resale market.
- Finance friendly.
- Beginner friendly.
- Steady capital growth (generally)!
Disadvantages of Single Lets
- Generally the lowest Gross Yield and Return on Investment (ROI) for a given capital input.
But thats about the only disadvantage I can think of!
What’s not to like about vanilla single lets?
In an age where people are chasing HMO’s, Serviced Accommodation and commercial conversion opportunities, the common or garden vanilla single let could be forgiven for being unloved.
It is a bit like being the used Volvo in a dull grey when everyone is lusting over the red Ferrari next door (with apologies to Volvo owners)!
However, much like the Volvo, it is cheap to run, reliable and there are many more buyers than for the Ferrari, should you ever want to sell it.
It is my opinion that every property investor should cut their teeth on a single let and start to chalk up some real-life landlord experience before moving onto more exotic assets. A portfolio of single lets is a solid backdrop to any portfolio and is what my portfolio largely consists of. In my many years of landlording experience, I can report that:
- I experience very little, if any, voids (I have some properties that have the same tenants for the last 10+ years).
- I have experienced good capital and rental income growth.
- Whenever I have sold such properties, there is strong demand from owner-occupiers and investors.
- Financing and re-mortgaging has been straight-forward.
- Management is about as hands-off as it gets.
It might not be sexy, but such properties are effective wealth builders. In areas of strong owner-occupier demand, some of my properties have more than doubled in value during my period of ownership.
For the majority of people, they won’t need to look further than such properties. Buying 2-3 bed houses in larger towns and cities in good areas is about as simple a recipe for investing success as you will find, with an easy exit should you ever wish to sell.
Single Lets: Flats vs. Houses
I have a mixture of property types in my portfolio, from ex-Local Authority 1-bed flats through to 3-bed houses. All have proven to be good investments and all let well.
However, on balance, I would recommend buying houses rather than flats, except in very solid locations (e.g. London).
Three reasons for this:
- Freeholders / Managing Agents.
- Service Charges and Section 20 Notices.
- Deterioration of Lease Length
Let’s consider each in turn.
The Freeholder / Managing Agent
A freeholder is the entity (it could be an individual or an investment company) that owns the building itself. When you purchase a flat, you will be likely buying the leasehold to the property. That essentially gives you the right to occupy it for the duration of the remaining lease. Technically, should the lease run to zero then the flat would revert back to the freeholders ownership.
There are some advantages of this set-up for a property investor. The freeholder is responsible for:
- The maintenance of the building structure itself (e.g. roof repairs).
- The management and maintenance of any communal areas (e.g. gardens, reception, corridors, parking, fire alarms and so on).
- The insurance of the building.
The freeholder usually appoints a Managing Agent to undertake the above tasks on their behalf, just like you might appoint a Letting Agent to manage your property rental.
But the freeholder doesn’t do this for free. Costs are recouped via the levy of a Service Charge on individual leaseholders, which is payable every year (usually in 1 or 2 instalments).
The problem with this is twofold:
- The freeholder (and hence the Managing Agent, who works on behalf of the freeholder) are not necessarily incentivised to seek cost effective solutions, as ultimately the leaseholders pay. Indeed, it is not unusual for a freeholder to receive kickbacks on items such as insurance.
- You don’t have any control over the amount of Service Charge being levied, which is likely to increase annually and possibly outstrip any rental growth.
There is a potential further problem too. The freeholder and / or Managing Agent can be indifferent to the upkeep of the building and it can be difficult to get them to take action. Certain freeholders, especially investment companies, can be shark-like in their approach to leaseholders, with the view to extracting as much cash from them as possible.
In my experience, flats where the freeholder is the local council have proven to be the best. I think this is because the council will tend to be mindful of its obligations and play everything with a straight bat.
Section 20 Notice
When there are large maintenance tasks to be undertaken that will mean each leaseholder will be charged more than £250 for the cost of the works, then the freeholder must issue a Section 20 Notice alerting leaseholders to this fact. Although leaseholders can make recommendations, ultimately the freeholder decides, gets the work done and then bills the leaseholders (in the majority of cases, requiring the money up front before works begin).
This means that you could receive a substantial bill at relatively short notice that you are expected to pay. I once had to pay circa £6.5k contribution towards roof repairs on one of my flats, for example, with the full amount due up front.
The corollary of this is that, should individual leaseholders refuse to pay or be slow in paying, then essential works could be delayed, to the detriment of all leaseholders.
Again, I have direct experience of this. As part of my £6.5k contribution mentioned above, the management company were going to repoint the joints in the brickwork where required. Unfortunately, my flat needed this doing urgently as crumbling mortar meant damp was penetrating into my flat, much to my tenants and my annoyance. However, because a couple of leaseholders were slow in paying, the managing agents refused to start the pointing work until all funds were collected. In the end, I paid an extra £200.00 to sort out my own pointing in an effort to not lose a good tenant. But essentially I ended up paying twice.
There is an argument that says that the benefit of not being the freeholder means there is less headache for a leaseholder, as the freeholder takes care of the maintenance and management of the building and at least any costs are shared between all leaseholders.
However, the converse to that is you have no control over what maintenance and repairs are done and when. I prefer to be in control of that.
Lease Length Deterioration
When you purchase a flat, you are buying it subject to the remaining lease term. This decreases with every year of ownership and can start to devalue the flat once it approaches 80 years remaining and if it gets low enough, can render the property unmortgageable. Every leaseholder has the right to extend their lease (once they have owned it for a minimum of 2 years) by 90 years on top of the existing remaining lease length, whilst also reducing the ground rent payable to zero. However, this comes at a cost and the shorter the remaining lease, the more expensive it is and you will have to pay the freeholders legal costs as well as your own legal expenses. This does give rise to investment opportunities if you are the buyer however!
This is my opinion and experience with flat investments and it is not uniform. Despite what I say above, probably my best investments have been flats in London, especially where you get the chance to purchase a share of the freehold and take back control (as I have done in one case).
However, on balance, if your funds stretch to it then I would purchase freehold houses over leasehold flats. Even more so outside of large cities.
Single Lets and the TKM Triangle
In summary, Single Lets are about as simple (and effective) a property strategy you can get:
- Time. This requires the least time to manage. A well maintained property with a good tenant will be relatively hands-free. There are also a plethora of Letting Agents that will take care of this for you.
- Knowledge. Whilst this might require the least amount of knowledge to get going out of all the property investment strategies mentioned here, there is still a significant body of knowledge you will have to acquire. You will need to be able to source appropriate properties, analyse the numbers, perhaps manage a refurbishment and get it ready to let. If you choose to self-manage, you will need to understand all your statutory regulations in this regard.
- Money. Given you can start with a 1-bed flat, Single Lets require the least amount of capital input out of all the property investment strategies discussed here.
With that said, if you have zero property investment experience, then Single Lets are the best place to start to gain a relatively low-risk body of experience.