Freehold V Leasehold

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We’ve been chatting with a few investors recently who have been asking about apartments. Apartments can look like a very good investment on paper with high yields, often modern, affordable and in central locations. What most estate agents don’t advertise are the downsides of owning apartments (and other leasehold property). Most apartments are leasehold but you can buy apartments that come with a share of the freehold however these are rare.

So what is the difference between a freehold and leasehold property?

With a freehold property you own the land and everything on it. Leasehold property gives you temporary ownership of the property but not the land it sits on. That land still belongs to the freeholder.

Leasehold property come with ground rents, service charges and a lease expiry date.

Ground Rent

Ground rent is the payment made to from the leaseholder to the freeholder. Commonly these are annual payments ranging from £10 to £250. Details of the ground rent payments (frequency, amounts, increases etc) are detailed in the lease.

Service Charges

Service charges are payable to a management company for looking after the building and communal areas. The charges cover things like buildings insurance, ground maintenance, cleaning and communal electrics. Some city centre apartment blocks may have a gym or swimming pool and service charges will be significantly higher to cover the upkeep of these. The management company is appointed by the freeholder but residents can form their own management company providing enough owners agree under the ‘Right to Manage’.

Leases

A leaseholder, much like a tenant, takes the lease for a period of time, after which the property reverts back to the freeholder. Lease lengths vary and can be up to 999 years. Problems arise when the length of the lease is less than 80 years. The value of the property will decline rapidly and you’ll find that there are very few lenders willing to give you money to buy it. Leases can be extended but this process can be complex and expensive.

We have a landlord who is going through the process on a flat they own and the freeholder is proving very difficult to even get hold of, nevermind negotiate with.

Do Your Homework

Don’t assume that all houses are freehold and all apartments are leasehold. Residents of Fernwood would be quick to warn you otherwise as many of the houses are actually leasehold and they are having a tough time with the management company set in place with all the charges that are being imposed on them. Likewise, some apartments come with a share of the freehold which eliminates the lease risk but does mean you have to be involved with the running of the building.

In all, leasehold property can be a very good investment but you (and more importantly your solicitor) need to be aware of the terms of the lease and associated costs. Your attractive yield may look good but have you taken into account the ground rents and service charge as these are not things you would expect the tenant to pay for…

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