The Essentials of Buying Leasehold Versus Freehold Properties

Do you know the difference between buying a freehold versus leasehold property? Is one a better investment than the other? Does it matter?

The fact is, the majority of flats in England are leasehold, while most houses are freehold properties.

It’s important to understand the difference between the two before buying or renting a property.

 

What’s the difference?

A leasehold property is typical for flats or developments, where multiple homes are part of a larger building on a plot of land. It means that, even though you’ve bought the property and have a monthly mortgage, you still have a landlord… the freeholder.

Homebuyers or investors buy a ‘lease’ for the property from the freeholder, who owns the land and building.

The lease can be any length. As short as 30 years, as long as 999 years. However, 90 to 120 years are common. This means your ownership of the property is limited to a set lease period.

When the lease expires, the property reverts to being a freehold property, as the building and the land are under the ownership of the freeholder.

Because of this, some mortgage lenders may be cautious to lend on a property with a short lease.

You can ask the landlord to extend the lease by 90 years after you’ve owned the property for two years. However, the costs of extending a lease can be significant.

On the other hand, buying a freehold property means that you’re the owner of both the building and the land it stands on.

 

The Unique Details About Leasehold…

Here are the key features of a leasehold property:

• When you buy the property, you buy a lease from the freeholder
• The contract between you and the freeholder will include the your legal responsibilities, rights and restrictions
• The freeholder is responsible for the upkeep of the communal entrance, corridors, the roof and the path to the front door. The freeholder must also insure the building against fire, destruction and damage.
• You will need to pay an initial purchase price and an annual ground rent, annual service charges, maintenance fees and a share of insurance for the building
• You cannot undertake any significant works on the property without the permission of the freeholder
• You may be subject to other restrictions, such as subletting rooms or pet ownership
• You can legally take over management of the property from the freeholder, which is known as ‘right to manage’. The freeholder still owns the building, but the leaseholder property owners become responsible for all the management aspects of the building.

Leaseholders can sometimes purchase the freehold of a building. This means that the leaseholder of a house who buys the freehold will own the building and the land. For the leaseholder of a flat, you can only buy a share of the freehold, along with the other leaseholders.

 

The Unique Details About Freehold…

Here are the key features of a freehold property:

• There is no annual ground rent to pay because you own the land
• You don’t rely on someone else to maintain the building, because you have sole responsibility for maintaining and managing the building and land
• Freehold is the common way of selling houses, although some new-build houses are recently being sold leasehold
• Conveyancing costs are lower because the ownership contract is simpler than for a leasehold property.

 

What to Consider Before Buying a Property…

If you are buying a leasehold property here are the essentials you need to consider first:

• How much is the ground rent, buildings insurance and annual service charges? And what is the annual increase?
• How many years are left on the lease?
• How much will it cost to extend the lease (after two years of ownership)?
• What management services does the freeholder (landlord) provide?
• How much will the freeholder charge for considering changes to be made to the property?

Are you thinking about buying or renting a freehold or leasehold property? If so, REKA Property Management will help you make a considered decision.

If you want to know how to achieve solid rental returns and have peace of mind with your property, then call us on +44 (0) 203 286 6468 or email us at Admin@RekaProperty.co.uk

 

Doug

P.S. Please share your comments below. Do you currently own a freehold or leasehold property? How long have you been renting it? I would love to know your experiences and thoughts on this topic. I hope our paths cross again soon.