Why Invest In Studios?

Why Invest in Studios

Studio Apartments Today

Studios have been on the rise in recent times. You see them in every key city. But why? Why would someone want to live in a studio, and what makes it so appealing to investors? Let’s start by answering a few key questions first.

A studio tenant usually belongs to the growing working class. They want affordable, modern, stylish, and manageable houses, something that developers have been very quick to cater to. Over the past few years, studio apartments have been cropping up in metro cities all over the UK. The number of new houses currently being built in England jumped 31% in just 12 months according to statistics released by the Department for Communities and Local Government. However, despite the growth in both completions and starts, new housing construction remains far below pre-recessions peaks.

Quick Recap: How do Landlords Gain From Property?

There are two main ways landlords make money through property letting; capital growth and rental income growth. Let’s take a quick look at these.

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Capital Growth

When a property increases in value over time, it is known as ‘capital growth’. Capital growth, also known as capital appreciation, has been strong in recent times. But as we all know the value of property can go up as well as down at any time, and it is something that no one can predict. And of course the local conditions surrounding your property have a big effect.

Rental Income

Rental income, or ‘rental yield’, is another very important factor. It’s what the tenant pays you to live and use your property, and hopefully this will grow over time too. It is also hard to predict rental income, but it is usually a more reliant variable as even if a property value decreases due to economic conditions, usually rental incomes stay relatively the same. As a consequence of the recession, the private rented sector grew strongly, primarily at the cost of home ownership. Rental prices tend to follow an annual increase of inflation as well, so year on year prices tend to rise.

Why are Studios so Great?

Most property developers include a certain number of studio apartments in their projects because these are usually the first to be bought and, therefore, generate instant working capital for them.

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Owning A Low Cost Asset

We asked one of our recent property investors, Ellie Woods, about why they decided to buy a studio. Ellie bought a studio recently to live in herself in order to help save up for something bigger in the future. Ellie said “The main advantage is that my monthly outgo for the studio apartment will remain the same since the EMI (Equated Monthly Instalment) will be equal to the rent that I am currently paying anyway. Besides, I will own an asset whose price will rise in the future. Property is an investment and I don’t see my Studio depreciating anytime soon”.

Also known as bachelor apartments or efficiency apartments, studio flats are small and self-contained units, with sizes ranging from 400-500 sq ft. This is why they are the most affordable options in a building project.

Should you buy a studio apartment?

This depends on your need. Studios are best for singletons, students, or couples that are looking to buy for themselves or family members.

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Starting Out, Students, and Young Workers

“Most people who have just started their first job out of university or those young couples that have recently got married can’t afford to buy big apartments, especially in metro cities, where housing is expensive even if you rent it,” says Darren Hughes the Sales Manager at Aspen Woolf. He adds “Plus, people’s perceptions and needs have changed. Utilities and commuting have become more expensive. People now want modern flats that they don’t have to keep fixing, that are more economical and environmental, near to city centres and the lifestyle those city centres bring.”

For such people, a studio apartment is a good option, particularly if they spend most of their time at work. It’s even better if they can buy one near their workplace as it will help them save on transportation cost. “Usually, young people want to stay in an affordable place and sell it when they move to a different city for work.”

These properties also work for parents whose children are pursuing higher education degrees in Universities and may otherwise have to stay in a shared house, hostel, dorm, or somewhere far from their studies.

So as a quick recap, studios are great for anyone starting out in property investment, for students, and for young workers.

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Lower Price and No Stamp Duty

Besides the low price, another obvious advantage is that the stamp duty for such houses is less, or in most cases completely free! For instance, if you buy a flat worth £125,000 in Liverpool, the stamp duty will be absolutely free. However, if you buy one that costs anything above £125,000 and up to £250,000, the stamp duty will be 1%. This equates to a minimum of £1250 to a maximum of £2500 in stamp duty charges alone. It can go even higher if you decide to buy a property over £250,000, in which case the charge goes up to 3%. Thus if you buy a property for £300,000, a very low price for a studio to a 1 bed in London, you would look at stamp duty of £9000. You can check how much you need to pay as stamp duty by using the various calculators on real estate portals, such as stampdutycalculator.org or hmrc.gov.uk.

Is it worth an investment?

A studio apartment can be a good investment if you are a newbie or conservative investor wary of putting your money in equity or mutual funds. Most people consider real estate a safe investment option, so buying a studio apartment, for which you need to pay a home loan EMI of around £400; can be an extremely feasible choice. Or better yet if you can buy one outright, then you can enjoy the higher than average rental yields that studios generally generate. If you do your research you can easily have the rent covering the mortgage costs if you do end up getting a mortgage and get a little bonus on top of that as well. If you buy a studio from a development that is fully managed then you are left with almost no hassle at all except for service charges and ground rent.

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Selling Up

Even if you move to a bigger house later on, a studio guarantees a rental income. Alternatively, you could sell the flat and use the sale proceeds to make a down payment for a second house. These flats are easy to sell as the demand for smaller apartments is always higher than those for larger ones. This is especially true in England where there are growing student numbers and a growing younger population.

Better Investment Offerings

Studio apartments are an attractive option for real estate investors because of the high capital appreciation and good rental yields they offer. “Studio apartments in business centres and major city centres, such as Liverpool, Manchester, Sheffield and parts of Scotland, are in big demand. Prices have witnessed a capital appreciation of 10-17% a year in the past 3 years, with certain areas and cities much higher” he adds.

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Location

While buying a studio apartment, the most important aspect to consider is of course location. Location is always important in any property investment, but more so for studio properties. If you are looking for a buy-to-let for young professionals then you should buy be near a workplace hub and/or city centre as this will guarantee a steady stream of tenants or future buyers. If you want to buy for your own children going into university studies or as a commercial student buy-to-let investment then make sure that the studio is located within prime educational hubs and/or an easy reach to Universities. Studio apartments around these areas are in prime demand, especially if professionally managed.

Another good option that many people don’t think about is if it’s close to a major medical hub or hospital. Families of most people who have to undergo long treatments prefer to live in a studio apartment rather than shell out money for expensive hotel rooms.

Try and opt for a project in an area which has good connectivity and where new industries are being set up. Find out if any major government projects are coming up as this will enhance the resale value of your house.

Modern Alternative Options

Many people have also turned to Airbnb as an additional revenue source, especially in more touristy areas of cities. You can easily get a greater amount of revenue with the help of Airbnb reservations, but the downside of that is of course the fact that the studio might not be occupied 100% of the time.

Attractive Yields and Capital Gains

Andrew Donnelly, CEO of property marketing firm Whiterock Capital Partners, says studios can command rental yields of 1% to 1.5% higher than one-bedroom and two-bedroom apartments.

“That means from an investment perspective, studios are affordable to buy, but the yields are much better than bigger properties,” he says.

“Studios offer yields closer to 6%, whereas a one-bedroom apartment will provide a yield of 5% and a two-bedroom a yield of 4.5%. And when it comes to renting out studios, there’s a queue halfway down the street with people wanting to rent these properties.”

However, he says investors after quick capital gains should steer clear of studios. “It depends on why they’re investing,” McDonnell says. “If it’s for short-term capital gains, I wouldn’t advise them to buy a studio as capital growth isn’t as strong in the short term as it is for bigger apartments.

“But if you’re looking for strong rental return and an investment you don’t have to think about, then go for a studio.”

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I keep hearing something about a Furniture Pack?

If you plan to sell the apartment after a few years, it might be worth buying an unfurnished one. Though developers offer fully furnished studio apartments, most of the time you won’t actually know the cost of each piece of furniture or electrical item. So, it makes more sense to choose and pay for your own fittings and furnishing. Fittings are almost always set as developments get them cheaper by buying them in bulk, but a furniture pack is usually more flexible. However if you want to buy your own furniture keep in mind most developments cannot then guarantee yields if you choose to furnish the studio yourself. It is something each investor has to weigh up. If you are more geared towards an assured rental yield, then it’s best to pay a small fee for a furniture pack.

On the other hand if you are a seasoned investor and already know what yields you can generate from a studio within a certain area, then you could potentially save a bit of money by opting out of the furniture pack. Or if you are buying it for yourself or your own children, then why not furnish it with the furniture you want!

In Conclusion

Studio apartments are low-maintenance, affordable and concentrated in the trendiest parts of town. No wonder studio apartments are proving hard to resist for buyers and tenants alike.

For investors, studios are a more affordable and safer option than bigger properties and can provide a higher rental return.

In the last few decades, studios have become increasingly popular, particularly among the young and city dwellers, and there’s often little alternative if you wish to live in a city centre. It might just be the step you’ve been looking to get onto the increasingly competitive property ladder.

Advantages

The advantages include the following:

  • Increased security (provided it isn’t a basement or ground floor apartment)
  • Lower property taxes than detached homes
  • A range of sports and leisure facilities may be provided
  • Community living with lots of social contacts and the companionship of close neighbours
  • Communal serviced gardens, lawn and pool maintenance if available
  • Fewer responsibilities than with a house
  • Ease and low-cost of maintenance
  • Lower running costs than a house
  • The ability to live in a location where owning a house would be expensive, e.g. a city centre
  • Higher rental yields
  • An easier step onto the property ladder
  • Usually has no Stamp Duty, dependant on price
  • Smart use of space

 

If you learned something new from this this article and want to take the next step, then why not quickly check out our 5 Ways To Spot An Up-And-Coming Area before you take your final plunge into property!

This Article was written by Harri Laitalainen, a property investment fanatic, marketing professional, and lover of Boston Terriers.

Note: The views expressed are the author’s own and do not reflect in any way, the views of Aspen Woolf. Readers are advised to carry out their own due diligence before taking any decision.