In recent years, buy-to-let has become one of the most popular investment opportunities available to homeowners. It’s a great way to make extra income while renting out your home. But as with any business there are complexities to understand, such as whether leasehold properties are good buy to let opportunities.
Leasehold properties often have a number of disadvantages that make them unsuitable as a buy-to-let investment.
For years now property investors have been arguing over whether it’s better to look at leasehold or freehold property.
Both have their positives and negatives – it just depends on which strategy you believe will suit you, as an investor, best.
What is a leasehold property?
A leasehold property in the UK tends to be a flat. When you purchase it you retain the rights for the property for a particular period, whereas a freeholder has complete control over the building and owns the land on which it sits.
A lease option is the written agreement between the freeholder and whoever is exclusively leasing the property. The latter has the ‘option’ to buy, rent or sell the property (depending on the document’s specific wording).
Negatives of a leasehold buy to let
- Possible no letting clause. Just because you’ve purchased the lease for a property, it doesn’t necessarily mean you can legally let it out. There may be a clause in the lease which bans sub-letting.
- Ground rent payments. Unlike a freeholder, the leaseholder has to pay an annual ground rent (in additional to any communal charges such as stair cleaning, lighting and garden maintenance). These costs can increase over the years if there’s no ‘cap’ written into the agreement.
- Lease length. Most leases are for a fixed period of around 99 years. Once you reach the end of the lease, it’s more problematic trying to sell the property, and which will have fallen in value because of this. It’s possible to extend a lease (usually if you’ve owned the property for at least 24 months) but, like most things these days, it comes at a cost – a pretty big one in this case.
- Freeholders can change. Yes, you may purchase the lease from one freeholder but he or she can sell it on, meaning you don’t know who you’re going to end up with. It could, for instance, be a freeholder who is pretty laid back about maintaining the property, meaning its value could drop over time.
- Freeholder could prove useless. Your new freeholder could also act like an incredibly silent partner to the extent you can never get a hold of them. This is a particularly bad scenario when you come to sell your leasehold. So, if you’re the kind of landlord who likes control, then, quite frankly, you’re not going to enjoy owning a leasehold property.
- Leaseholder relationships. It’s not just the freeholder who could potentially negatively affect the state of the property and its value. If other leaseholders in the flat don’t pay their maintenance charges then repairs don’t get done.
- Development restrictions. And talking of control…being a leaseholder means you might not be able to add on that planned extra bedroom and en-suite (the ultimate decision being the freeholders).
- Mortgage difficulties. It can prove tougher trying to get buy to let finance for a freehold property, especially if it has a relatively short lease (less than 70 years).
- Too many leaseholds. Most new builds these days tend to be leaseholds, making freeholds more desirable and likely to result in better capital appreciation over time.
Advantages of a leasehold property
Of course it’s not all bad news. Leasehold properties can be far less expensive than freeholds to purchase.
TIP: Remember to add in the ground rent and service charges when it comes to calculating the yield.
If you manage to find one without the disadvantages above then it could make for a good investment, giving you the advantages associated with rental properties.
What are the potential risks and benefits of investing in a leasehold property for buy-to-let purposes?
When considering investing in a leasehold property for buy-to-let purposes, it’s important to weigh the potential risks and benefits. Leasehold properties come with certain restrictions and additional costs, but they can also offer a lower initial investment and potential for higher rental yields compared to freehold properties. Understanding the freehold and leasehold differences is crucial in making an informed decision.
Can I Calculate the Rental Yields for Leasehold Properties for Buy-to-Let Investments?
Yes, you can calculate rental yields for leasehold properties for buy-to-let investments. Rental yields can be calculated by dividing the annual rental income by the property’s value, then multiplying by 100 to get the percentage. This will give you the gross rental yield. To get the net rental yield, subtract any annual expenses from the annual rental income before performing the calculation.
What are the benefits of investing in leasehold properties for buy-to-let purposes?
Investing in leasehold properties for buytolet investment strategy can be beneficial due to potential higher rental yields, as well as the ability to leverage your investment. Leasehold properties also provide the opportunity for property appreciation over time, making them a valuable option for buytolet purposes.
Final thought
On balance, I don’t think there are enough good reasons to generally recommend leasehold properties over freehold. Of course, it comes down to the individual property on offer, and if you’re a first-time buyer I would always recommend seeking expert advice before making a decision.
Find the correct property and you can expect a steady rental income. Get it wrong, and it can be a financially terrible decision you’ll deeply regret.
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