What is a Leasehold Property Investment?
If you’re considering adding any kind of property investment to your portfolio, understanding the difference between a leasehold property investment and a freehold investment is essential. Both are perfectly feasible but come with different attributes that you should understand before investing.
What is a Leasehold Property?
A leasehold is a method of owning property – usually an apartment or a flat – for a fixed amount of time (known as the lease).
The leasehold does not include the land where it is built, which means that typically you’ll be subject to paying annual ground rent to the owner of the land.
Once your lease expires, ownership of the property then moves back to the freehold owner that owns the land.
The amount of time that your lease lasts for will depend on the property itself. Some leases can be as low as 20 years while others can last for 200 – it all works on a case-by-case basis. Regardless of how long your lease lasts, during your ownership you will be considered a ‘tenant’ of the freehold land.
What you will commonly find is that leases under 80 years or so are generally considered undesirable – mainly because it becomes a challenge to find a mortgage lender open to lending for leases this short. This in turn can negatively impact the overall property value.
One particular advantage of leasehold investments is that usually, the freeholder is responsible for the majority of the property upkeep.
While leaseholders obviously have to care for the inside of the property(s), freeholders will generally maintain the exterior spaces such as walls and roofs, common areas such as stairwells and any gardening on the land.
There is typically a fee included, alongside the ground rent, to contribute to this upkeep, but in the long-term it can save investors both time and money.
What is a Freehold Property?
A freehold property is much simpler to explain. When you own the freehold, you own the land (and any associated properties) outright.
This can be preferred because that means there is no time limit as you’d find on a lease – you own the land indefinitely.
However, freehold ownership does come with the caveat of extra responsibility. You’re responsible for the maintenance of the property, the land and, in the event that you take on a leasehold tenant, all of the admin that comes with that.
Similarly, in most cases freehold property is initially more expensive to purchase than leasehold property, which can have an effect on your bottom line.
Are Leaseholds bad investments?
There’s a common misconception that because leasehold property is more complicated, it makes for a worse investment.
In fact, the opposite is true. The trick is to find leasehold property that suits your needs as an investor.
If you can find an agreement that means you have a property with great initial value, which you can then rent out over the long-term and potentially sell for profit, there’s nothing wrong with having a leasehold during that time.
For many investors, a leasehold is preferable as it removes the extra cost and headache of unforeseen maintenance that could arise.
Remember, this is all based on a relatively long-term lease. Anything under 80 years could seriously hinder your chance of getting a mortgage and increase the chance of prices being impacted, so make sure to find a lease above that bracket.
In short – leasehold investments are not bad. What it boils down to is your willingness to manage the extra administration that comes with freehold. For all intents and purposes, when you make a leasehold investment, you still own the apartment, you’re just mitigating extra maintenance to other people.
What’s a good Leasehold?
As previously mentioned, any lease with less than 80 years can have a negative impact on your overall investment – making it harder to secure a mortgage and potentially pushing property prices down.
In terms of a good lease, anything over 80 that suits your needs is ideal for an investment. This will allow you take advantage of a larger range of products and make it easier to sell in the event you look to.
What happens when a Leasehold expires?
Unfortunately, there’s nothing that can drop the value of a property quicker than a lease coming to the end of it’s term.
The good news is a lease can easily be extended. Under the 1993 Leasehold Reform Act, property owners are legally entitled to renew their lease for 90 years at a fair market price – under the condition that they’ve owned the flat for two years.
Whether you should extend or not is down to your personal circumstances but it should be considered that extending a short lease can add thousands to your property’s value. The longer the lease, the more you’re likely going to get for your property.
The cost of extending is largely determined by a standard formula to ensure a fair market price, although if you’re extending for a short period of time this price can rise dramatically.
Leaseholders also have access to a support network funded by the UK Government, the Leasehold Advisory Service. Here leaseholders can get assistance with the process as well as support with any disputes that may arise.
REMEMBER: If you buy a property that has around 80 years on the lease, it’s vital to consider an extension, as the cost of extending rises dramatically if it drops below 80. If you have 85 years on the lease for example, remember that while you can get the process started, you need to have owned the property for two years before an extension can go through.
How much will it cost to extend my lease?
The cost of extending a lease can vary depending on the property and lease length, although you should always be receiving a ‘fair market price’.
Doing your research prior to extending can help you gauge the potential cost – speak with other investors or residents to get a ballpark figure.
At the same time, consider the associated costs:
Legal Fees: You’ll typically be required to pay your legal fees, plus the ‘reasonable costs’ of the freeholder. Remember that these costs do not include the freeholders legal costs, especially if they’re negotiating the price or dealing with court.
Valuation Fees: Before your lease extension, a surveyor will visit your home to inspect and officiate the extension. These can run anywhere between £400 and £900, depending on the property.
Below are several examples you would expect to pay using the lease calculator from the Leasehold Advisory Service:
As you can see, the difference between an extension at 79 years and 89 years is huge. That’s because any lease extension below 80 years factors in the marriage price, which can impact costs heavily.
Leasehold and Freehold property investments are two sides of the same coin – both are very feasible as either a first-time or additional investment and your choice really boils down to your personal preference.
In terms of cost they’re both similar – whether you’re paying ground rent or building maintenance costs – and in truth, it’s likely the biggest investment will be your time depending on your choice.
As always, make sure you speak to an expert before you consider making either a leasehold or freehold investment to see what works for you.