Should I buy a Leasehold Property?

Welcome to this week's edition of The Business Owners' Property News, my weekly newsletter aimed at helping business owners and busy professionals get started in property investing.

This week we look at leasehold properties - which in the main are flats, apartments and maisonettes where buildings are split into multiple leasehold units and sold off by the freeholder.

We will look at some of the issues that put investors off buying leasehold property and how changes that are coming in to resolve those issues and finally we will analyse a leasehold purchase we have recently made.

What is a leasehold property?

A leasehold property is a type of property where the buyer essentially purchases the right to occupy and use the property for a specified period of time, known as the lease term. However, the land on which the property sits remains owned by the landlord or freeholder.

PROBLEM 1: Leasehold ownership typically involves paying ground rent to the landlord and may also involve additional service charges for the maintenance of communal areas or other services.

PROBLEM 2: The lease term can vary widely, from a few decades to several centuries, but eventually, the lease will expire, at which point ownership of the property returns to the landlord, unless the lease is extended or renewed. As the lease period shortens, the extension cost increases.

PROBLEM 3: Leasehold properties often come with certain restrictions and obligations outlined in the lease agreement, which can include rules regarding alterations to the property, subletting and maintenance responsibilities.

IT'S FOR THE ABOVE REASONS THAT MANY INVESTORS DO NOT BUY LEASEHOLD PROPERTY!

But things are changing...

The Leasehold and Freehold Reform Bill

The Bill, introduces to Parliament in November 2023, is aimed at fulfilling the government's manifesto pledges on leasehold reform. It promises significant changes to improve homeownership for leaseholders in England and Wales.

Key provisions include:

1. Extending the standard lease extension term for houses and flats to 990 years, eliminating ground rent upon payment of a premium, providing long-term, hassle-free ownership.
2. Removing the 'marriage value' to reduce costs associated with extending leases nearing expiry.
3. Allowing immediate access to freehold ownership or a 990-year lease extension, removing the 2-year ownership requirement.
4. Increasing the limit on non-residential space in buildings, enabling more leaseholders to buy their freehold or manage their building.
5. Setting maximum time and fees for information provision in property sales, streamlining the buying and selling process.
6. Mandating transparency in service charges to empower leaseholders to scrutinize and challenge unreasonable costs.
7. Replacing opaque commissions with transparent administration fees for buildings insurance.
8. Extending redress schemes for leaseholders to challenge poor practice.
9. Eliminating the presumption for leaseholders to pay freeholders' legal costs when challenging poor practice.
10. Granting freehold homeowners equivalent rights to transparency and challenge as leaseholders.
11. Ensuring freeholders and developers cannot evade liabilities for building remediation work, in line with the Building Safety Act 2022.
12. Banning the sale of new leasehold houses, except in exceptional circumstances, ensuring every new house is freehold from the outset.

These measures aim to empower leaseholders, improve consumer rights, and foster fairer and more transparent property ownership.

Our latest purchase - you guessed it - a leasehold maisonette!

I used to be firmly in the camp of NOT buying leasehold property for the reasons summaried above.

With the reforms in mind - and also by analysing carefully the obligations and costs associated with a property, the Freeholder and the number of years left unexpired of the lease, we have started adding such properties to our portfolio.

The purchase with the numbers

Ground floor, 1 bed maisonette - purchase price ￡92,500

110 years left on the lease

Ground rent - ￡10 per annum

Service Charge - ￡250 per annum

Capital employed (25% deposit / stamp duty and fees) - ￡28,125

Rent - ￡800 ppm

Mortgage - ￡283 ppm

Net profit - ￡495 pcm

Annual Profit - ￡5,940

ROCE (Return on Capital Employed) - 21%

So, as you can see, this is a superb little investment to have in your portfolio!

Leasehold properties are definitely within our strategy of building a diversified portfolio that gives us good returns on our cash without putting all our eggs in one basket!

And they are quick to start generating profits, whereas our main strategy of creating HMOs (shared living properties) are capital intensive and take longer to set up.

Want help in getting started in property investing?

Get in touch on 0121 647 7090 or info@brahmaproperty and find out how our #BOPP - The Business Owners' Property Programme can help you get started.

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