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Why buy a leasehold property?

In the world of property investment, understanding the pros and cons of both freehold and leasehold properties is crucial.

For high net worth individuals looking to diversify their portfolios, buying a leasehold property can often provide a unique opportunity.

Here we'll explore what a leasehold property means, its advantages and disadvantages, and why it could be a valuable addition to your investment portfolio.

Understanding leasehold properties

Leasehold means that you own the property, but not the land it stands on. With a leasehold building, you have the right to live or operate there for the length of the lease agreement with the freeholder (the person who owns the land).

This contrasts with a freehold property, where you own both the property outright and the land for an unlimited period.

Advantages and disadvantages of leasehold properties

Leasehold properties can offer several benefits. They're generally cheaper than freehold properties, making them an attractive option for investors looking to increase the number of properties in their portfolio.

Furthermore, buildings insurance is typically covered by the freeholder, reducing the responsibilities of the leaseholder.

However, owning a leasehold property also comes with certain challenges.

Ground rent payments to the freeholder are a common feature, and service charges may apply for the upkeep of communal areas.

Additionally, when the existing lease drops to a certain level (usually 80 years), the property can decrease in market value unless a lease extension is negotiated.

LEASEHOLD PROPERTY FAQS

What happens when the lease on my leasehold property expires?
If you don't extend the lease, ownership reverts back to the freeholder. It's advisable to start the process of extending the lease when it still has 80+ years remaining to avoid 'marriage value' costs.

What is 'marriage value' in lease extension?

'Marriage value' is a term used in the leasehold system. It comes into play when a lease drops below 80 years. Essentially, it's the increase in the property's value after the lease has been extended. The cost of this increase is split equally between the freeholder and leaseholder during a lease extension.

Who is responsible for maintenance and service charges?

The freeholder is generally responsible for maintaining the building's exterior walls and common areas, while the leaseholder is typically responsible for the interior of the property.

How much ground rent should I expect to pay?

Ground rent can vary significantly from one leasehold property to another. Many modern ground rents are 0.1% of the property value per year, but it's crucial to check the terms of your lease agreement to understand these costs.

What is a sinking fund?

A sinking fund is a pool of money collected from leaseholders by the freeholder or management company for major works on the building, like roof replacements or structural alterations. It helps spread the cost of large one-off bills over time, making them more manageable.

Can I make improvements to a leasehold property?

Yes, but you may need to get permission from the freeholder, especially for significant changes. Always check the terms of your lease before starting any work.

What happens if I don't pay ground rent or service charges?

Non-payment of ground rent or service charges can have serious consequences. The freeholder can take legal action to recover the debt, and in extreme cases, they could apply to the court to forfeit (end) your lease.

Can I buy the freehold of my leasehold property?

In many cases, yes. This process is known as collective enfranchisement. Leaseholders of a building can join together to buy the freehold. There are certain conditions to meet, so it's worth seeking legal advice.

How does contents insurance work with leasehold properties?

While the freeholder usually covers the building's insurance, contents insurance – which covers your personal belongings inside the property – is typically the responsibility of the leaseholder.

What is the role of a managing agent?

A managing agent is often hired by the freeholder or management company to handle the day-to-day running of a leasehold property. This can include collecting ground rents and service charges, arranging repairs and maintenance, and dealing with leaseholders' enquiries.

Residential vs Commercial Leaseholds

The term 'leasehold' applies to both residential and commercial properties. While the residential side often involves leasehold flat and apartment developments, commercial leaseholds can include offices, shops and other business premises.​​

The latter often have shorter lease lengths but can provide opportunities for rental income and capital appreciation.

Success Stories

Many property investors have successfully added leasehold properties to their portfolios. For instance, city centre flats have proven particularly profitable due to high demand for rental properties in these areas.

Other investors have capitalised on the lower purchase price of leasehold properties to diversify their portfolios and spread risk.

While buying a leasehold property comes with unique considerations, it can be a valuable investment opportunity when approached with understanding and due diligence.

As always, it's important to seek professional advice before making a significant property investment.
Our team is always available to provide further guidance on property wealth management. Please reach out to us for any additional information or assistance you may need.

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