Transcription
Imagine buying a flat for 1.65 million pounds and then 10 years later it only being worth 655,000. That is a 62% loss. Or say you've bought a smaller one that's 499,000 and then it only being worth 255. That is nearly half of your money gone. And these are real stories. They're not rare, they're not uncommon, and they're not exclusive to London. Four out of 10 flats in the UK last year sold for less than they originally purchased. That is an incredible stat to me.
In the northeast, nearly two-thirds of flat sellers sold at a loss. And that is if you can even get it sold as well. In the northwest, nearly 15% of people lost money on flats that they had originally purchased. We are seeing prices plunge by up to 27% in Westminster, but we're also seeing that in Manchester, Birmingham, and Leeds. And the people that are losing their money aren't necessarily rich investors, people that you want to hate. They're nurses, they're teachers, they're young workers that have bought flats out of convenience cuz they're working in the area and they like the idea of a low-maintenance property.
And I can speak from personal experience. My first property, I was an accidental landlord. I'd bought a flat for myself cuz I didn't necessarily need a garden. I wanted to live central to where I was at the time in Wakefield near Leeds. And when I originally bought the flat in 2007, I paid 119,000 pounds. When I sold it exactly 10 years later, I sold it for 819,500 pounds. If you price in inflation, I have made a loss on that property. I would never ever buy a flat, and there are a lot of reasons why, and I'm going to tell you in this video. I will explain the big traps that are trapping landlords from Cumbria to Cornwall and everywhere in between.
And before I carry on into the video, if you're enjoying the videos on my channel, please click like, please subscribe to the channel. It really helps me push out some better content each time.
Let me show you what the actual property market looks right now. The property price is just a smidgen under 300,000 pounds. But while houses with gardens, two and three-bed properties, terraced and semi-detached are holding their own, flats are definitely not doing the same thing. Over the past decade, flat prices have rose just over 18% on average. That is compared to a 41% average on terraced houses.
One of the first issues with flats at the moment is the cladding crisis. This is still going on 10 years on from the Grenfell fire disaster, and the government has identified 4,300 buildings where the cladding is not safe or appropriate. Whereas the real estimate and data is that there's nearly 9 to 12,000 buildings with the incorrect cladding and making them unsafe. The total cost to fix this is a staggering 20 billion pounds estimated. That could be a lot more. There are a lot of people that are trapped in this. The cost is potentially going to go to the owners of these properties, the landlords, the tenants within those. This is a huge cost for them.
The market impact is devastating. In Salford, just outside of Manchester, where there'd been a massive boom, sales on properties with unsafe cladding is down by 67%. You're going to struggle to get a mortgage on them. So, they're almost unlendable, which means they're almost unpurchasable. That has also meant that the prices of these properties have reduced by up to 30%. That is a huge amount of money. In Croydon, buildings with unsafe cladding, similar to what I've just mentioned, demand has dropped by 85% and therefore some of the prices have dropped by up to 33%. Huge numbers again.
And you're asking, "Well, what happens when the bank sees that it fails the ESW1, which is the effectively the unsafe cladding test?" The bank values your property at zero. Zero. You will not be able to raise any finance against it, and anybody that's trying to buy that property will be the same. The only person you could probably sell that to is a cash buyer, and savvy cash buyers are unlikely to invest in buildings with cladding issues. There is no time scale on the fix, and it is out of their control to be able to fix it themselves. Just to sprinkle a little bit of salt into the wound, insurance premiums on these buildings have gone up by 187% too. So, if you are stuck and you cannot get rid of your flat, then you are also paying a huge premium on top of that for your insurance.
The second trap that is destroying the buy-to-let market for flats is section 24. Section 24 has been mentioned lots, and I've talked about it on my channel a lot, but it is effectively the tax. If you own a property in your own name, any rental income that you get is classed as income. You cannot deduct anything from it, barely deduct anything from it. Any rental income, say it's a thousand pounds, just goes onto your income and earning sheet, and you cannot deduct your mortgage payments from it. You are restricted to basically a 20% tax credit on any rent that comes in, which for a lot of people just makes no sense to own a flat or a property in their own name. So, if you landlord owner of a buy-to-let flat in your own name, you will be paying tax on nearly all of the rental income. You will then be paying the mortgage. You will then be paying a leasehold charge. You'll be paying a service charge. And you'll be paying that increased insurance premium we've just mentioned. By the time you get to the end of it, you are probably losing money. It's barely a charitable investment, which takes me to the third trap, which I've just mentioned, and one of my biggest pet peeves with owning a flat and one of the reasons that I sold mine when I did.
It's the service charge explosion. When you own a flat, you have no responsibility for the grounds, maintenance, and or the communal areas. Somebody else is responsible for that. Fantastic. That's awesome. But you have no control over how much they charge you. Service charges now are pretty much a hidden tax. There is no cap on what they can charge you, and it's becoming increasingly expensive. They are now being run by effectively opaque management cartels that they can charge you anything they want, and they often do. We're seeing mad charges for certain products, things like 65 pounds for a 15-minute hallway clean. I remember my service charge going from nearly 80 pounds a month up to 180 pounds a month in 5 years. And there was nothing I could do about it. Stomp my feet, cried about it, but there was nothing we could do. We were forced to pay it. And if you didn't pay it, they'd come after you pretty hard, and you'd end up getting the bailiffs at your door if you did not comply.
But when things are hard, when you're renting out a flat at the moment, imagine having another 2,000 to 3,000 pounds in a service charge per year. It is wiping out a big chunk of anybody's profit if they are making any. And one thing that you don't get told is that your service charge is directly related to your mortgage affordability. So, an extra 3,000 pounds a year can reduce your mortgage affordability for about 25,000 pounds if you're looking to buy a flat for a residential purchase. Either way, whether you're a buy-to-let landlord or a residential owner, the service charge is an absolute kick in the nuts.
The market is run by death, debts, and divorce, the three D's. And it is an illiquid graveyard for flats at the moment. But as always on this channel though, I do not want it to be all negative. There are different ways to invest in property, and there are different ways to pivot at all times. So, if you have a few hundred thousand pounds to invest and you're looking to buy your first investment property, don't necessarily panic and go, "Flats are dead. Buy-to-let market's dead. I don't want to invest anymore." Firstly, maybe watch one of my previous videos about the five best areas to buy. That would be a good starting point on where to invest your money. And as always in my buy-to-let guide, which you can get if you click on the link in the bio, it tells you the sweet spot we look for when we're looking for properties. We look to buy anything between 70 and 150,000 pounds in up-and-coming areas, but we're always looking at two and three-bed terraced and semi-detached properties. These ones are ones that are going to get capital growth, good tenant demand, and they don't have those sneaky service charges I've just mentioned.
The other part is if you do own a flat, there are ways of fighting back, certainly against those service charges. If over 50% of you in the block are unhappy with the service charge and the management company that are managing it, you can fight back. If you rally around and like I say, have 50% of you, you can legally ask for control of the block of flats back. It's not easy, especially if you're in a large block, to get over 50% of the people to sign that piece of paper and get you to manage it with a couple of your mates. But if you are at a point where your head in hands, you really can't afford to pay that service charge, or you are really getting the piss taken out of you, then it is important to be able to try and do this. Owners who have executed this have often slashed their service charge in half and immediately restored some market value back to their property.
And until service charges are really, really regulated, modern UK leasehold flats remain one of the riskiest property investments for me, and something that I'd absolutely avoid at all costs. This is why on my channel and inside Property Academy, we're always looking to buy freehold properties, two and three-bedders, where there's lots of demand for tenants. You have control over the plot of land that you purchase, and there are not so many external factors that are risking your own property. If you need any further help on how to invest, please click on the link below. If not, I'll see you in the next one.