Is Buying a Leasehold a Good Investment Property Strategy?

• by Chris Andrews
• September 3, 2024

Property investment can be a great way to build wealth, but it’s important to understand the different types of ownership. You might have heard about freehold and leasehold properties, but what do these terms really mean?

When you buy a freehold property, you own both the building and the land it sits on. This gives you full control and means you won’t have to pay extra fees like service charges or ground rent. On the other hand, leasehold properties are a bit trickier. With these, you’re buying the right to live in a property for a set number of years, but someone else owns the land and building. This often applies to flats in blocks.

Key Takeaways

• Leasehold properties come with extra costs like service charges and ground rent
• Short leases can make properties hard to sell or get a mortgage on
• There are clever strategies to work with sellers to optimize the deal for both parties

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Owning Leasehold Property: What You Need to Know

When you buy a leasehold property, you pretty much only get a house. Unlike freehold, you do not become the owner of the land it sits on, leaving a risk that even when keeping up with any mortgage payments it could still be taken away from you (although this is a rare eventuality).

Leasehold ownership gives you limited control. You may not be responsible for maintaining the property and grounds, but you do have to pay service charges or ground rent. This can cost you money in the long run.

Unlike freehold, you do also may need to consider lease extensions or renewals. Basically, your ownership has an expiry date! As such freehold properties are easier to sell and often more valuable.

Leasehold homes are less likely to be houses rather than flats. They’re typically harder to get a mortgage for, as lenders see them as more risky. You also have less freedom to make changes to your property without needing permission.

 

Differences Between Leasehold and Freehold Properties

When you buy property, you might encounter two main types: freehold and leasehold. Let’s look at the key differences.

Freehold means you own both the building and the land it sits on. It’s yours until you sell it. No one can take it away, except the bank if you don’t pay your mortgage.

Leasehold is different. Someone else owns the land and building. You sign a lease for a set number of years. When it runs out, you can extend it, but it costs money.

Leasehold flats often have extra costs:

1. Mortgage payments
2. Service charges for upkeep
3. Ground rent
4. Possible lease extension fees

Watch out for short leases. If there’s less than 80 years left, it’s hard to get a mortgage. Extending the lease can be very expensive – sometimes over £60,000!

Freehold properties are simpler. You don’t pay service charges or ground rent. You handle repairs yourself. There’s no lease to worry about.

Since the Grenfell Tower fire, flats over five storeys need a safety certificate. If they fail, it can make them hard to mortgage and very costly to fix.

While freehold is often easier, you can still make money with leasehold. It just takes more care and planning. Always check all the costs before you buy.

Here are some key benefits of freehold ownership:

• Full ownership of land and building
• No service charges or ground rent
• No lease to renew or extend
• Easier to sell and get a mortgage
• More control over your property

While freehold properties have many advantages, they’re not always the best choice for everyone. It’s important to weigh up the pros and cons based on your personal situation and financial goals.

 

Financial Impact of Leasehold Properties

Buying a leasehold property can have big money effects. Unlike freehold homes, you don’t own the land with a leasehold. This means extra costs and risks.

You’ll pay service charges on top of your mortgage. These cover things like cleaning common areas and gardening. They can be hundreds or thousands of pounds yearly. Ground rent is another cost, usually a few hundred quid a year.

Watch out for short leases. If there’s less than 80 years left, it gets hard to get a mortgage.

Leasehold flats can be tricky to sell if there are problems. Cash buyers might want big discounts for short leases or safety issues. This could mean you lose money when you sell.

Still, there are ways to make cash from leaseholds. You could buy flats with short leases and extend them. Or help owners with problem properties. It takes know-how, but it can work.

 

Creative Ways to Make Money with Leasehold Properties

Leasehold investments can be profitable if you know how to spot opportunities. One clever strategy is to look for flats with short leases. These properties often sell for much less because most buyers can’t get mortgages on them.

If you find a flat with less than 80 years left on the lease, you might be able to buy it cheaply with cash. You’d then need to wait two years before extending the lease. This can boost the value a lot.

But there’s an even smarter way to do this. You could work with the current owner to start the lease extension process before you buy. This lets you avoid the two-year wait. You might use an option agreement or delayed completion to make this work.

Another tactic is to look for flats in buildings that have failed safety checks. These can be hard to sell or rent out. But if you can fix the issues, you could see a big jump in value.

When weighing up leasehold deals, don’t forget about service charges and ground rent. These can eat into your profits. Always factor them in when working out your sums.

It’s also worth keeping an eye out for chances to buy the freehold of a building. This can be a great way to add value to leasehold flats you already own.

While freehold is often simpler, leasehold can offer good returns if you’re smart about it. The key is to solve problems that put other buyers off. By doing this, you can find deals others miss.

 

Extending Your Lease and Managing Costs

When you buy a leasehold flat, you need to think about lease extension. As time goes by, your lease gets shorter. This can make it hard to sell or get a mortgage. If your lease drops below 80 years, it gets tricky.

You can’t extend your lease right away if you buy with cash. You have to wait two years. This can be a problem if you want to sell quickly.

There’s a clever way around this. You can ask the current owner to start the lease extension process before you buy. Then you can finish it when you purchase the flat. This lets you avoid the two-year wait.

Don’t forget about ongoing costs with leasehold flats. You’ll pay service charges and ground rent on top of your mortgage. These can add up:

• Service charges: For cleaning, gardening, and repairs
• Ground rent: Usually a few hundred pounds a year

Be careful when working out your profits. Estate agents might not include these extra costs when they tell you how much you could make.

Keep in mind that service charges can go up. After the Grenfell Tower fire, many flats needed new safety checks. This led to big increases in service charges for some owners.

While leasehold flats can be tricky, they can also offer chances to make money. If you’re smart about it, you can turn problems like short leases into opportunities.

 

Spotting the Pitfalls of Short Leases

When you buy a leasehold flat, you need to be aware of the risks that come with short leases. A lease under 80 years can cause big problems. It gets harder to get a mortgage or sell the flat. The value of the property can drop a lot too.

As mentioned above, if you buy a flat with a short lease, you can’t extend it for two years. This means you might have to sell to cash buyers at a lower price. Investors who buy these flats often want big discounts. They know they’ll have to wait and pay more to extend the lease later.

There are some clever ways to get around the two-year wait. You could ask the current owner to start the lease extension process before you buy. Or you could use special agreements to buy and extend the lease at the same time. But these methods can be tricky.

Remember, with freehold property, you don’t have to worry about any of this. You own it forever and can always get a mortgage on it. You also don’t have to pay huge sums just to keep living there.

 

Calculating Profits for Leasehold Properties

When looking at leasehold flats, it’s crucial to figure out your real profits. Don’t just rely on what estate agents tell you. They might say your profit is higher than it really is.

Let’s break it down with an example from the numbers given earlier. Note: due to changing rates of mortgages and service charges these numbers may not be typical for many areas. They still serve the point by way of example:

• Rent: £600 per month
• Mortgage: £300 per month
• Apparent profit: £300 per month

But wait! There’s more to consider:

• Service charges: Can be £100-£150 per month
• Ground rent: Often a few hundred pounds yearly

So your actual costs might be:

• Mortgage: £300
• Service charges + ground rent: £150
• Total monthly costs: £450

This leaves you with a true profit of £150, not £300. That’s half of what you might have expected!

Remember:

• Service charges can go up
• You might face extra fees for building repairs
• Short leases can cause big problems

Always do your sums carefully. Don’t forget these extra costs when working out if a leasehold property is worth buying. It’s easy to make less money than you thought if you’re not careful!

 

Safety Assessments’ Impact on Leasehold Properties

 

EWS1 Forms and Getting a Mortgage

The External Wall System (EWS1) form has become a crucial factor for leasehold flats. If you own a flat in a building over five storeys tall, you might face issues with mortgages if your block lacks this safety certificate.

Failed EWS1 assessments can make your property unmortgageable. This means you can’t sell to buyers who need a mortgage, limiting your pool of potential purchasers to cash buyers only.

The costs linked to failed EWS1 assessments can be steep. You might see your service charges jump from £1,000 to £4,000 yearly. These extra fees cover the work needed to bring the building up to safety standards.

When buying a leasehold flat, ask about the EWS1 status. A valid certificate can save you from future headaches and costs. Without one, you risk being stuck with a property you can’t easily sell or remortgage.

Remember, these safety checks are now a key part of owning a leasehold flat. They affect not just your wallet, but also your ability to move or change your mortgage in the future.

 

Making Smart Choices: Owning vs Renting Property

When buying a home, you’ll come across two main options: owning and renting. Let’s look at the key differences to help you decide.

Owning property means you buy both the house and the land it sits on. It’s yours until you sell it. No one can take it away, except the bank if you stop paying your mortgage.

Renting property means someone else owns the land. You sign a lease for a set number of years. When it runs out, you can extend it, but this costs money.

Rented homes, often flats, come with extra costs:

1. Service charges for upkeep of shared areas
2. Ground rent for the land
3. Possible extra fees for big repairs

These can add up.

When working out profits on a rented home, don’t forget service charges and ground rent. They can cut your earnings in half!

Since the Grenfell Tower fire, flats over five stories need a safety check. If they fail, it can make them hard to sell and raise service charges a lot.

While you can make money from both types, owning is often easier. But there are clever ways to profit from rented homes too, like fixing short lease problems.

Remember, every problem is a chance to make money if you’re creative!

 

Making Money from Leasehold Quirks

Leasehold properties can be tricky, but they also offer unique chances to profit. You might think freehold is always better, but don’t write off leaseholds just yet.

One clever way to make money is by extending short leases. When a lease drops below 80 years, it gets hard to mortgage and insure. This scares off many buyers, creating an opportunity for you.

Here’s how it works:

1. Find a flat with a short lease (under 80 years)
2. Negotiate a low price due to the lease issue
3. Work with the seller to start the lease extension process
4. Buy the flat and complete the extension at the same time
5. Refinance or sell the property at a higher value

This approach lets you avoid the 2-year waiting period for new owners to extend leases. It’s a bit complex, but it can lead to nice profits.

Another strategy is to look for flats with building safety issues. After the Grenfell Tower tragedy, many blocks failed safety checks. This causes huge problems for owners, but it’s a chance for you to help and make money.

You could:

• Buy flats at a discount due to safety concerns
• Work with other owners to fix the issues
• Increase the value of your investment

 

Recap of Factors to Consider with Leasehold Properties

Remember, leasehold costs can surprise you. Always factor in:

• Service charges
• Ground rent
• Potential increases in fees

Don’t just trust what letting agents tell you about profits. Do your own maths to make sure the numbers work.

While freehold might seem simpler, leasehold properties can be goldmines if you know what you’re doing. The key is to spot problems others want to avoid and find creative solutions. With the right approach, you can turn leasehold headaches into profitable opportunities.

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Disclaimer

The information provided on this page does not constitute investment advice, financial advice, trading advice, or any other sort of advice and it should not be treated as such.
This content is the opinion of a third party and this site does not recommend that any specific property or property type should be bought, sold or leased, or that any training investment should be made.
The property market carries risks, with prices constantly fluctuating. Readers should do their own research and consult a professional financial advisor before making any investment decisions.

While freehold might seem simpler, leasehold properties can be goldmines if you know what you’re doing. The key is to spot problems others want to avoid and find creative solutions. With the right approach, you can turn leasehold headaches into profitable opportunities.