To leasehold or not to leasehold?

by Readers Question

4 years ago

To leasehold or not to leasehold?

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To leasehold or not to leasehold?

Flat vs HouseI’m now finally ready to purchase my first BTL property!

Deposit saved, mortgage in principle agreed, solicitor on standby but, I’m still not sure what type of property to invest in.

I’m looking to buy a property in the Liverpool area for up to £70,000 with a 25% deposit.

Option 1: A 2 bed leasehold flat has come available for 67,000. It’s in a rentable area close to good bus links, shops etc and in good condition only being constructed in 2004. But I’m a not fully comfortable with buying a leasehold property. Should this be a concern? I must also add the property is repossession.

Option 2: I could easily pick up a terraced house for c.60k which would be ready to let right away but at this price it will be in an area where I’d be letting to students & DSS and with potential of small amount of capital gain.

So suppose the question I am asking is, do I take the safe option and buy a leasehold flat, in good condition which will rent fast and give an Ok yield but possibly start costing me more on service charge payments if things go wrong with the building or do I go with a freehold terraced house where I would have full control of the building and not have to deal with management companies.

Any advice much appreciated

Adam

Adam



Comments

Neil Patterson

4 years ago

Hi Adam,

This is a tricky one as we don't know the locations of the properties.

Some areas seem to favour one over the other as it depends what buyers and renters expectations are. Eg in Norwich for the same price most people would prefer a house, but in London the expectation can be that the only option would be a flat.

Being a Norwich (out in the sticks) boy my gut feeling would always be for a house, but you make a compelling argument for the flat.

Having been through several property cycles what I can tell you is that in a down turn the prices of flats always seem to suffer worse than house.

Ian Narbeth

4 years ago

You need to check very carefully the terms of the lease. Are there any restrictions on the type of subletting allowed, e.g. a requirement that the occupiers are one household only? Do you need to get the landlord's consent or approval to letting? Do you need to register each AST with the landlord and pay a registration fee? Does the landlord's insurance policy restrict lettings in any way? Are there higher excesses or other conditions? You may also want to take out separate loss of rent insurance.

Gary Nock

4 years ago

I agree with Neil.

Having bought several leasehold flats then if I had my time over again then buy terraced houses. No service charges and no lease extensions to worry about. If you do decide to buy the flat check the length of lease. Many lenders will not lend on a "short lease" which is under 70 years!

To be safe then do not buy anything less than a lease of 80 years plus. At 80 years lease extensions get more expensive. At 60 years really expensive. And at less than 60 years positively extortionate. I have just advised a client to walk away from a one bed with 74 years left on the lease because of this reason.

Chris Amis

4 years ago

Slight adjustment to the last, aim for 83, you need to own for 2 years before you can insist on an extension.

Steve Gracey

4 years ago

Make sure you factor in the extra costs of the leasehold property. Look at what the service charge is in the lease but more importantly what has actually been paid for the last few years. Make sure there is an element in there for reserve fund for cyclical works and if not budget for it. Do your sums again for the 2 properties and I'm sure the profitability will sway you to the Freehold property.

Obviously there will be maintenance on the Freehold property but you are free to get quotes from whoever you like / develop your own relationships with tradesmen to ensure you get value for money or DiY. I reckon maintenance on Freehold will be 75% cheaper than similar Leasehold property - that could be an extra £750 pa in your pocket for a typical flat. IMHO maintenance charges on Leasehold is vastly overpriced, unnecessary, poor quality and comes with a whole host of other costs for non jobs like Health & safety Survey, Accounts audit, Management fee, works supervision fees etc.

LVW4

4 years ago

I agree with everything above, and can identify with Steve's comments.

At least you will be buying (hopefully) way below market value, which gives you some leeway.

I would urge you to find out who the Freeholder is, and check if they have a track record with the LVT (now First Tier Tribunal) and Google them. You will see the same names time and again, which tells you the freeholder is IMHO disreputable and out to rip you off (I would be happy to give you the names of the freeholders I've had, and continue to have, problems with). Ideally, the leaseholders should own the freehold (RTE), which is a big step in your favour,

If no RTE, at least check if there is now a Right to Manage Company in place, and speak to one of the leaseholder directors before you buy to ascertain service charges and performance.

Check on any major repair works done e.g. roof.

Good luck.

r01

4 years ago

Between them, the others above have said exactly what I would say.

I did own one leasehold maisonette but only bought it after checking it had a peppercorn lease with no options to increase and a 95 years term. I only kept it a few years and sold for a good capital gain in the last boom but everything else I've owned has been freehold.

My advice is freehold, freehold, freehold, freehold, freehold, freehold, freehold, all the way.

Mandy Thomson

4 years ago

I would look firstly at who the potential tenants are and take it from there. I let one bedroom flats in Greater London to young professionals in their first homes - all these people have proved to be excellent tenants and I shall be aiming for this demographic with my next investment.
As has been touched on, this tenant group favours good transport links in a central location, at least as close to city centres as is affordable, and is looking to pay lower rent for a well presented low maintenance property - therefore, a small flat in or close to a major city centre fits the bill.
A house in a cheaper area might seem like an attractive investment on the face of it, but it's more likely to attract tenants on a low income who might run up rental arrears - are you able to carry that, not just financially, but think of the potential stress involved?
It has been my experience that a flat that doesn't have high maintenance charges and is managed by a good maintenance company is much less hassle than a property you have a fuller stake in (freehold or shared freehold) where you shoulder much more responsibility and expense. Good tradesmen can be hard to find.

Adrian Jones

4 years ago

In my experience leasehold properties usually have more problems than freehold for the reasons that have already been stated here.

However, another key factor is the difference in rental income.

Mark Alexander

4 years ago

Hi Adam

You haven't mentioned an Option 3

You say that £60k buys an OK freehold in an area that would attract lower quality tenants. If you were to spend £75k on a freehold would that change things?

I also suggest you run a few different properties though our landlords calculator. You might well be surprised at the results - see >>> http://www.property118.com/calculating-rental-yields-and-returns/

To source and do your due diligence see our Property Research Tool >>> http://www.property118.com/property-search-tool/
.


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