If you’re buying a property to let, you might be faced with a choice between a freehold and a leasehold. In fact, one in five properties sold in the UK are leaseholds. In this article, we’ll look at what a leasehold is, how it is different from a freehold, and the investment implications of owning a leasehold.
What Is the Difference Between a Leasehold and a Freehold?
In a freehold property, the owner controls the property in its entirety, including the land and the physical dwelling. There is typically no time limit on your ownership.
Leaseholders own the building itself but not the land it's built on. Leaseholders lease the land from a landowner/landlord. Typically these contracts are time-bound. You can lease a property or a building for say 50 or a 100 years, but there is an expiration date where your interest ends.
What Are Some Key Advantages and Disadvantages of Having a Leasehold? Are There Other Costs That an Investor Should Consider?
Typically, leaseholds are 33% less expensive than freehold properties. This is to compensate for the fact that leaseholds have a time limit on the investor’s interest, and other restrictions, on the property. For those looking at short-term accommodation, or short-term investments, leaseholds might provide an attractive route.
However, when your lease is up, you will need to renegotiate a new contract with your leasehold landlord. The landlord is not obligated to renew their contract with you.
Leasehold properties may also require less responsibility on the leaseholder to directly maintain responsibility of repair and maintenance. It is much easier to ask the tenant to assume responsibility for repairing and maintaining their unit. These covenants are also enforceable against all future titles, which is not possible for freehold properties.
However, not all tenants enjoy a leasehold agreement. Tenants may also find the covenant to repair and maintain the building burdensome.
Are Leaseholds Harder or Easier to Rent Out vs. Freehold?
Renting out a leasehold is more complex than renting out a freehold. If you are the leaseholder, you should ensure that your lease allows for subletting. If it does, you should also confirm any limitations on subletting. Consent is critical.
Some leaseholds have stipulations that the property must be rented out as a whole or can only be used as a single-family residence, which will restrict your options.
Is It Harder, and Does It Take Longer to Sell a Leasehold vs. a Freehold?
It can take significantly longer to sell a leasehold property compared to a freehold property. A freehold sale will typically take roughly 6 to 10 weeks to sell, while a leasehold can take two to three months to complete. Nearly a third of leasehold sales fall through, as they are more complex and require more legal work, including reviewing the terms of the lease, the accounts, disputes, and more.
Leases with 85 to 90 years are harder to mortgage, and the cost of extending the lease is high. New lessees won’t qualify for a lease extension until they’ve owned the property for two years or more.
Choosing between a leasehold and a freehold can be difficult. If you prefer the cheaper cost to buy, and the lower cost of maintenance, it may serve your purpose despite the outlined complexities. If you like having greater flexibility or the ability to sell your investment quickly, investigate freeholds further.
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