Understanding the difference between leasehold and freehold can help you make better purchasing decisions.
As a property investor, having knowledge of the different types of tenure and what they could mean for your rental yield will help provide clarity when considering and comparing investment properties.
What is freehold?
A freeholder owns a building in its entirety including the land on which the property is built. If you are buying a house it will usually be freehold, most flats are leasehold with the exception of those with a share of freehold.
Share of freehold
When looking for a property you might come across properties that are ‘share of freehold’. The ownership of this type of property is arranged so that each unit within a building has shared ownership of the freehold title, as well as a leasehold interest in the flat.
It is often the case that the freehold is in fact owned by a company that each leaseholder will then own a share of. The arrangement can seem confusing as both the leasehold and the freehold remain in place; the lease is not defunct if the freehold is shared.
A benefit of purchasing an apartment with a share of freehold might be that the flat owner has a direct say in what will happen within the buildings but it is not always a popular arrangement and it is most common for apartment buildings to be owned by the freeholder and the flats within to be sold as leasehold.
What is leasehold?
Leasehold is a method of owning a property for a fixed period of time. Leases are granted by the freeholder, of the land and building within which the leasehold property is situated.
Lease lengths vary in length but are commonly 99, 125 or 999 years in length. Mortgage lenders will usually require for there to be a minimum of 50 years remaining on a lease in order to lend against the property.
As the leaseholder you own the property subject to the terms of the leasehold so it is important to understand what your commitments will be prior to moving forward with buying a leasehold property.
Whilst leases for residential property can often be many pages of legal terms and clauses the fundamentals are usually the same across the board in that; in return for paying appropriate charges to the freeholder and observing the obligations and covenants within the lease, the freeholder will grant the leaseholder the property for the agreed term, maintain the building and provide any other benefits that might be sent out in the documentation.
One of the most important factors to consider when purchasing a leasehold property, especially when purchasing a property with the intention of letting, is to understand what services charges will be applicable.
A service charge is a cost to the leaseholder, charged by the freeholder to contribute towards the maintenance and upkeep of the building and land on which the property sits, it will usually also include buildings insurance.
The costs can vary dramatically and are often dependent on the location of the building and the amenities available. For example, a building which has a gym or swimming pool that requires maintenance will usually have a higher service charge than a property that doesn’t have either.
A porter, concierge, lifts, communal gardens – these benefits all have a cost and that expense is passed onto the leaseholders via the service charge.
It is not always the case that a new build development can provide a final figure before the property is built as in the years that the property is being constructed it might be that charges for lift maintenance alter, or cleaning costs change; most developers can often provide an estimate though.
Renting a leasehold property
Service charges might seem costly, especially when a building has many on-site amenities – the bonus of having amenities on-site, however, is that tenants are often willing to pay a much higher rent which in turn offsets the higher service charge.
Those seeking a property as a buy to let should ensure the lease does not state that the property cannot be rented to another party. Surprisingly there are many properties in which the lease will state this so be sure to conduct thorough due diligence before committing to a purchase.
Taking advice from a professional investment consultant who has vetted the development thoroughly will ensure the property is a valid buy to let option.
Leasehold vs Freehold
It is not often the case that you’ll be comparing two almost identical properties and be choosing between a leasehold and freehold as certain property types lean towards a particular tenure.
Flats within buildings are most often leasehold and houses are usually freehold. Whilst some houses have been sold with leases in place this will no longer be the case as in 2019 the government banned the sale of new-build houses as leasehold.
Share of freehold properties are usually period homes which have been converted into flats or small apartment buildings.
Large apartment buildings with hundreds of units can be better managed with a freeholder and management company taking the lead on the overall maintenance and upkeep. There is sometimes a misplaced negative light shed on leasehold property but the set up generally works to everyone’s advantage in these types of developments.
Property investment experts
UK property tenure does not need to be a complicated matter, the arrangements in place for certain types of homes usually work well for all involved parties. Having an experienced advisor on hand to provide guidance when finding a suitable investment property can ensure you fully understand all the aspects of a purchase and what they mean for property ownership in the long run.
We are a group of seasoned property consultants who assist both first-time and established investors in building investment property portfolios. To discuss your plans for property investment please contact us +44 (0) 2039507939 or send us an email at firstname.lastname@example.org.