A common question I am often asked is whether a one or two bed is a better property investment.
Most agents will tell you that a two bedroom apartment will achieve better capital growth over the years but the lower initial investment with the one bedroom properties help them achieve a better rate of return. This is also Googles answer to the question and it is very general and largely incorrect.
The size, layout and number of bedrooms will always depend on the end user and its intended use.
Firstly, I would stress that any investor should look at their own limitations first before deciding. This is really important because I regularly see smaller investors pushing themselves to an uncomfortable level because they have become emotionally attached to an apartment which is more expensive than they intended to buy. Regardless of size, my first advice is to stay within budget.
You will also find, in most cases, the location and quality of the property is more important than the size of the apartment you buy. This isn’t always the case, but 90% of the time, you are better buying a cheaper unit in a better development than the best unit in an inferior development.
Any apartment development will be made up of a percentage of each property type. It is important to understand why this is. This will sometimes give you your answer, but it is difficult for the investor to find the answer to this unless they are aided by a good agent who has strong links to the developer.
In an ideal, transparent world, you would like to think that the developer has designed the layout and proportions with the end user market in mind, but this is not always the case. The developer may have limitations, particularly if the building is a conversion. When converting an office building to residential, for example, the number and positioning of the windows will sometimes solely determine how the building can be efficiently divided up. In a building with lots of windows, they will have more flexibility, less windows will limit the ratio of bedrooms (with windows) to living spaces.
But let’s remember that most developers are only interested in selling the apartments, and have no interest in the end user market, and recently, particularly in large cities, they have focused their designs on creating mainly one bedroom apartments. This is prevalent in London where one bedroom apartments yield highest for buy to let investors. However, many have followed suit in northern cities where there is more of a market for two bedroom apartments (mainly due to affordability).
The largest overseas market for UK property is China, and traditionally, Chinese investors prefer to invest in small one bedroom apartments. This has been mainly due to their previous experiences in London. This led to many new property developers flooding the market with one bedroom apartments in northern cities. So sometimes, developers will design their buildings based on the investor market as opposed to the rental and end user market. This can present a great opportunity to investors if you can identify that this is happening. Where there is an unusual proportion of one property type in a development, there is less competition for tenants provided that there is no other tangible reason why there are fewer.
The most important guide though is to look at your end user market and how the property is to be primarily rented out. The answer will normally be very different for standard AST lets and short term corporate and holiday lets.
For standard AST lets, it is really important to get this right because your tenant is longer term. In terms of demand, if your target market is families or in a suburban area, then most of the time, a two bedroom apartment will have a higher demand. In city centres, the market can be very mixed and we have found that there is little difference between the returns of a one bedroom and two bedroom property, but we have found that tenants in two bedroom apartments tend to stay longer.
For short term lets focused on the corporate market, a one bedroom apartment will give you a larger percentage return, particularly if the length of stay is short. For holiday lets, the average length of stay is really important. For people going on a short term break or 2 to 3 nights, a one bedroom property will yield higher, but for stays of 1 to 3 weeks (for example in holiday villages or retreats) then a two or three bedroom property will have more demand.
With an AST standard let, the floor space is more important, so it is usually better to go for a larger one bedroom apartment than a smaller two bedroom apartment. Your potential tenants will view the property before moving in as opposed to short term lets where additional income will not be achieved for extra living space as nightly rates are based more on the number of bedrooms than the size of the rooms.
It is important to understand that your net returns are heavily influenced by the price of the property. Depending on the price difference between the different unit types, it may be more advantageous to upscale to a larger apartment if the price difference is minimal. For example, in some developments (particularly in conversion projects with their restrictions), you may find a 550sqft one bedroom apartment priced at £200k and a 500sqft two bedroom apartment priced at £210k. Clearly for short term lets, the two bedroom apartment will give you a bigger return.
In summary, this is a supply v demand market, so this should always be your overriding consideration and many people forget this important fact. In the current market, there are far fewer new two bedroom apartments being built than one bedroom apartments and three bedroom apartments are extremely rare.
There are so many variables which can influence unit selection and for 95% of my customers, they will ask me to select the best unit available. Factors such as the positioning of the kitchen, the size of the windows, the aspect, the view, usable wall space for furniture, room shape and apartment positioning are all important. Your agent should know the local rental market, the development and end user preferences better than you and be able to identify any opportunities that will give you the edge over other investors, so it is important to ask about these and ask for a recommendation, and the reasons why, even if you don’t follow up on it.
The views, thoughts and opinions expressed in this article belong solely to the author, Michael Johns, and are not necessarily those of Residential Estates, or other groups/companies to which Michael Johns is affiliated.