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Saturday, February 02, 2013

Avoid Studio Apartments

I was chatting to a mate the other day.  His partner is on the hunt for another buy-to-let apartment to add to her growing buy-to-let portfolio.  It seems that there are plenty of one bedroom apartments and studio apartments available under 70k in the centre of Sheffield and with a big student population there is a ready market of tenants.  This probably explains why a good one bedroom apartment will let for over £500 a month. 

Smaller rental apartments have higher rental yields

Generally when it comes to rental yields, the smaller the rental property the higher the rental yield.  So by buying a studio apartment a landlord stands to pay less and thereby tie up less of their vital capital and secondly secure a higher rental yield.  However, generally I would never consider buying a studio apartment.  I would always pay more for a one bedroom or two bedroom apartment. Why pay more and get a lower rental yield.  Surely this does not make sense for someone who has always emphasised the importance of income and rental yield when evaluating which buy-to-let property to buy.  The reason is the all important re-sale market. 

Re-sale market is key

If you think of who you will eventually sell to when a landlord crystalizes their buy-to-let investment.  What you don't want is to have is the choice of only a collection of yield hungry landlords all desperate to drive down your price and maximise their rental yield.  Instead, you will get a much better price for your property and endure far less haggling from a bevvy of buyers that fall in love with your buy to let and want it as their first home.  Most first time buyers of the type you want as a buyer will always look to save a little more and buy a one or two bed apartment.  There are exceptions to this rule.

The exceptions and when to buy a studio apartment

There are two exceptions that I can think of when buying a studio apartment makes sense.  Firstly, in London.  People in London will buy anything and pay a fortune for even a rabbit hutch or cupboard so normal rules don't apply.  In a property boom, first time buyers desperate to get on the property ladder and not miss out will look to buy a studio otherwise most will save up the extra and buy themselves a one or two bed rather than being stuck with a 1 room apartment (not good for impressing a potential partner with and pulling!).  Therefore, as a property investor I would always tend to avoid a studio apartment and spend a little more cash and invest in a one bed.

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