I can recoup capital cost in 3 years on 23 year lease purchase?
I am considering buying a property that has 23 years left on the lease. The capital cost would be recouped in about 3 years from the rent it would achieve.
It seems a bit of a no-brainer, but I’m wondering if there are things I’m unaware of in this situation that could come back to bite me. I assume I won’t be able to extend the lease unless the freeholder agrees a price with me, but I’m not really too interested in extending the lease anyway. I’m looking at this for income.
Is there any advice anyone can give for this situation please. I hope I’m not missing an obvious problem.
Thanks in advance,
Jim
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Worth having survey done on leasehold flat?
Member Since July 2013 - Comments: 305
9:12 AM, 17th February 2016, About 10 years ago
Always important to have all the facts. I would check the cost of extending the lease.
Member Since June 2015 - Comments: 6
9:16 AM, 17th February 2016, About 10 years ago
Hi Jim
You have not mentioned how you plan to fund the purchase. Given the length of the lease it might not be easy to get a mortgage. It will of course not be an issue if it is a cash purchase.
Ashley
Member Since January 2015 - Comments: 21
9:39 AM, 17th February 2016, About 10 years ago
Depends where it is. If it’s in an area where leases are typically low yet there’s still a market demand for them e.g. Mayfair, then some lenders will still lend but on a dramatically reduced term. If you’re doing it on interest only that won’t affect the monthly installment though.
Member Since January 2015 - Comments: 21
9:46 AM, 17th February 2016, About 10 years ago
Even if you let the lease expire you would’ve got nearly six times your initial capital back in total at a notional rate of circa 30% p.a. Obviously I don’t know your tax situation e.g. what rate tax you’re on and what investment interest rates are going to be over the next 23 years. Plus how old you are and whether the income will last you out. There’s also the issue of whether you have dependents you’d like to leave something too. But assuming you’ve already done your sums on this, on the face of it, it looks like a no-brainer as you say.
Member Since May 2015 - Comments: 2190 - Articles: 2
10:01 AM, 17th February 2016, About 10 years ago
Have you taken ground rent and service charges into consideration? Does the lease require the return of the property in original condition at the end of the term? Could be expensive if this requires working gas lamps to be installed etc.
In summary read the lease, that’s where surprises are likely to be lurking.
Member Since December 2015 - Comments: 452
10:14 AM, 17th February 2016, About 10 years ago
So why are they selling it? Why isn’t everybody clamouring to buy it, everything should reach ‘market value’ if available on the open market?
I would have though any mortgage would be a non-starter, at a sensible rate, but as David says, read the lease small print, and is the ‘return’ advertised secure? Obviously buying or extending the lease could be a nice earner!
Member Since July 2015 - Comments: 81
10:34 AM, 17th February 2016, About 10 years ago
Jim
You dont say what kind of property it is but it could also be worth investigating if you could by the Freehold (or a share thereof). Could work out cheaper and more beneficial in the long term.
SB
Member Since April 2015 - Comments: 2
4:03 PM, 18th February 2016, About 10 years ago
Thank you for all your comments and advice. The property is the ground floor flat of a 2 storey house conversion. I will have to check but would imagine that any ground rent and service charge would be minimal and it sounds as though trying to buy a share of the freehold would be a better option than extending the lease if freeholder was open to the idea. Initially, I thought to buy the property with cash and let the lease run out. I worked out if I was to up the rent 2% year on year it would return over £294,000 over the 23 years. I am looking for cashflow at the minute and am happy to put £30k down as I would have earnt it back in about 3 and half years. Just wasn’t sure if there was something I’m missing as its quite as unusual situation, for me at least.
Member Since July 2013 - Comments: 305
5:13 PM, 18th February 2016, About 10 years ago
Just a thought, is this an auction property with a guide price?
Member Since April 2015 - Comments: 2
2:52 PM, 21st February 2016, About 10 years ago
Reply to the comment left by “Adrian Jones” at “18/02/2016 – 17:13“:
It is Adrian. I understand theres a good chance this could go well over the guide in which case I wouldn’t be bidding.