Ok, I have a rental in the UK. 25-29k is hella cheap! If you can get 275+ that's a good plan. Agreed, 2% is very unlikely in the UK, but it's a different game.
Cashflow properties = less risk in unforseen situations. If it's cashflowing and you lose your job, no big deal. If it doesn't pay for itself month by month, and you lose your job, can you afford to cover the extra costs?
Cheaper places will appreciate at the same rate as higher, IMO. But of course they key is leverage. I'm not a huge fan of it... mortgage for 95k, at what rate? 6-7+%? That'll take a big chunk... especially if rates go up (which they will) - not sure how long you'd be planning on taking to pay off the mortgage.
Also, I haven't claimed any depreciation on my house in the UK - not sure if it's the same actually, but in Canada you'll pay that back when you sell. So it's not "free money" here. It wouldn't help me in any case as I don't have other income in the UK now anyway. Worth checking.
If you can get 550-600 a month on the 135k place vs 275 on the 25k I reckon you'd be mad to. Are there extra fees for the flat - I guess it's leasehold, so there is that.. but what about extra maintenance?
If it's a shithole type place and you're only going to rent to people on the dole.. yeah I'd skip it. But, for the UK, 1% is a really good return. If it is NOT going to turn your life into a living hell, go for it.