What is the difference between leasehold and freehold?
Buying freehold property means that you own both the building and the land the building stands on. Buying a leasehold property means that you only own the building, and you also only own it for a certain amount of time, depending on how long the lease is.
Things to consider when purchasing leasehold property
Leasehold properties can still make great investment properties, but there are some things that you should take note of.
Properties which are leasehold are usually flats, with each flat having a proportion of responsibility for the upkeep of the whole building. The service charge will include the maintenance of communal areas, and insurances for the buildings.
You will also need to pay ground rent to the freeholder, which is a contractual payment for occupying the land that they own.
Work such as the maintenance of the whole building the flats are in and things like painting the exterior, is the kind of thing that a management company should be taking care of, and planning to undertake throughout the year.
Before purchasing a leasehold property, it’s important to understand who the management company are, how long they’ve been looking after the property, and whether or not they are active. You don’t want to be stuck purchasing a property looked after by a management company who take the money without undertaking the work properly.
Take a good look at the communal areas, lighting, cleanliness, clear markings of parking spaces, management details for contact purposes, scuff marks, and rubbish smells. The flat you might be looking at may well seem amazing for an excellent price, but if you have to wade through a pile of rubbish to get to the door – it’s going to be harder to convince tenants that it’s a great place to live.
The devil’s in the detail
With leasehold properties, it’s all about the terms of the lease.
- Firstly, how long is it for? A leasehold property can seem like a good deal, but if the lease is too short it can be costly to extend it, making it a bit less of a good deal than you thought.
- Are you actually allowed to rent out the property? Sometimes there are clauses in the lease that can prohibit you from doing so.
- If you can rent it out, do you have to pay a fee every time there is a change of tenant?
- What covenants are there in the head lease? As the tenants will have to be aware of and a abide by these. This could include things such as no commercial vehicles or no satellite dishes.
- Are there any other restrictions? We’ve come across numerous times where landlords have purchased a property, only to discover that it can only be rented for ten months of the year.
- You also need to make sure you understand what your boundaries are, which parking spaces are yours, fencing responsibilities and access through the property where it is shared.
Having said all this, we don’t want to put you off. There are some fantastic investment opportunities when it comes to leasehold properties, you just need to know what to look out for, and what to avoid. If you’d like some help with finding your first investment property, please get in touch with us – we can help!