Are Leasehold Properties Good For Buy-To-Let Investments?

Leasehold Vs Freehold

I genuinely chuckle to myself every time I ‘brand stamp’ my dogshit comic sketches (which take longer to doodle than I’d ever like to admit). I mean, who the hell is going to infringe intellectual property right laws over that garbage? I laugh.

Anyways… let’s take a gazillion steps back, right back to the humble beginnings of the landlord cycle! Buying property.

As a ‘landlord blogger’, do you know which topic I’ve managed to make a habit of side-stepping? Ironically, the most important step of becoming a landlord, the part where you’re required to man-up and nervously throw your hard earned cash at property.

Although, my tip-toeing around the issue isn’t really surprising, because ‘the ladder’ is becoming a rather ghastly monstrosity. What an eyesore. Unrecognisable. And that’s precisely why I haven’t joined in with the buying festivities for a good few years now, because as I disclosed back in 2015 (which was actually a late confession), the idea of buying another BTL in this current climate makes me feel physically sick, even though I still rank it as the most reliable vehicle to shove your money into. However, from my shoes, the honeymoon period is over; it’s toast; dead in the water. So that naturally means it all feels rather… less satisfying.

Other opportunities seem easier, cheaper, perkier, slimmer, tighter, more willing, and thoroughly more rewarding. Yes, I’m still talking about property/buy-to-let… among other things & spouses. And yes, I’m quite the timid badger; when things start getting remotely difficult I’m usually the first to flap around, soil my pants and take cover. That would explain why my life is surrounded by the remains of incomplete projects, missed opportunities and disappointed glares. Fortunately, I’m not one to focus on the “what if’s” in life, so I just blissfully stew and revel in my own steaming excrement. Yes, just like a pig-let (Oooh, I’m hilarious alright!!).

However, I don’t want my personal demons, which are currently arousing my therapist, to impede on your incentive to march forward. There’s still plenty to squeeze from the fruit, so let’s tackle a question every landlord should ponder at least once in their life…

Buying Property = Blast from the past

For someone in their early 30’s (but looks like they’re in their early 20’s, and late-teens in dim lighting), I’ve been deteriorating like someone in their 80’s, and that’s demonstrated by LBC talk-show radio station often being the default ‘play mix’ blaring out of my speakers when I turn on my car ignition (which I’ve discussed a few times before).

However, I must confess, since LBC started allocating time slots for Nigel Farage and Katie Hopkins to have their own shows, I’ve felt rather nauseous about supporting the station. Whoever’s brainchild it was to give them two imbeciles an even louder microphone should be prosecuted for Crimes Against Humanity. Fortunately, I don’t do politics, so if either of those wallies tick your boxes, “I’m not angry at you, I’m just disappointed.” Particularly if that numpty Hopkins is on your Christmas card list. I literally fantasise about detaching her tongue with a hammer and shoving it up her baggy ass. Yeah, just like tossing a sausage down a bowling alley.

In any case…

As I infrequently do during my Friday evening travels, I recently found myself crashing into the middle of ‘The Property Hour’ segment, hosted by Clive Bull and regular guest host, ‘Property Expert’ Kate Faulkner.

The premise of the show is simple: confused people call in to divulge their property related woes so they can benefit from expert advise. It must be said, many of the questions/scenarios make you realise how uncommon ‘common sense’ is, and how there isn’t a short supply of pettiness. God, the pettiness.

I’ve heard Kate on the show a few times before. I’ve always liked the cut of her jib. She’s got a good jib on her shoulders. An overall solid piece of jib.

This week she addressed a question regarding leasehold properties, specifically whether they’re good for BTL investments (this wasn’t one of those painfully stupid questions). The question jogged my memory and reminded me of where most of us have to start.

Yup, I’m about to smash n’ grab content from LBC again!

Are Leasehold Properties Good For Buy-To-Let Investment?

Good question, albeit rather primitive on the surface, and perhaps that’s why many buyers’ live to regret their decision- which makes it an extremely important question to ask BEFORE signing your life away or spending a single nugget.

I don’t want to get into the whole Freehold Vs Leasehold properties debate right now, because that’s been done and dusted. Right over here. If you need to get up to speed, do so, and then we can regroup to proceed. But to keep it overly simplistic for now, we can say that the question really boils down to this: House vs Flat, since most apartments/flats in the UK are leasehold, while houses are freehold.

Please note, the question is being answered from the perspective of buying leaseholds in TODAY’s market, in 2017 and the foreseeable future, when house prices are insanely high and the running costs of being a landlord is spiralling out of control due to all the red-tape.

Right, so let’s take a listen to Kate Faulkner’s answer…


(This was aired on the Thursday, 30th of March 2017)

Transcript, key takeaways & my backseat narration…

1) Does the lease allow letting?

The first question you need to ask!

Some leases do NOT allow you to sublet (technically, I think you’re always subletting if you let a leasehold property), so before buying a leasehold for the purpose of BTL, look for any restrictive covenants in the lease that do not allow subletting.

I’ll hazard a guess and say 1) many landlords are letting without having checked their lease (if that’s you, go check) 2) many landlords are knowingly breaching the terms of the lease. Ballsy.

2) Sinking fund

Many leases enforce a regular contribution to what is known as a ‘sinking fund’, which is a mechanism that helps cover any unexpected maintenance or repairs, like replacing the roof, which can run into tens of thousands of pounds.

The fund is generally beneficial for all leaseholders, because it helps spread maintenance costs proportionality, based on when each leaseholder purchased their lease. Without such a fund, you could end up paying an equal amount as all the other long-term leaseholders to cover the costs of major repairs, even if you only just purchased the lease. How demoralising.

You’ll probably want your lease to include a sinking fund. However, bear in mind, it will add to the running costs. Sad face.

3) Length of lease

Needless to say, longer the lease, the better. You can get leases up to 999 years these days, but from my experience, most start their life with 99’ish years.

Problems can occur when the length of the lease approaches the 85 year mark. Not only do shorter leases dramatically affect property value, but also diminishes the saleability. Moreover, extending a lease to a more desirable duration ain’t free.

4) Service charge & Ground rent

Ground rent is the money that the leaseholder pays to the Freeholder for ‘leasing’ the land that the property sits on, which is usually a fixed sum and is paid annually. The service charge is payment for the communal services (such as maintenance of gardens and communal areas).

Despite popular belief, two different costs. Nonetheless, both contribute to ongoing running costs which most leaseholders are subject to.

Not only is it important to be aware of those costs before purchasing a leasehold property, but it’s equally as imperative to know how much they can increase by (which they often do). Sensible leasehold contracts will have increase caps.

Basically, more complications and fees. You can see an overview of leasehold expenses on the GOV website.

5) Freehold or leasehold?

Kate does say that she ideally opts for freehold properties (presumably based on the points above). However, she also mentions…

6) Leasehold = Bargains

You can get some bargains when buying leasehold if you know what you’re doing (I’d personally make the same argument for freehold, you know, “if you know what you’re doing”).

I’ve found that leasehold properties in urban areas are generally cheaper than freehold. That’s probably what makes them more appealing on the outset. In many cases, only on the outset. It’s usually a painful tumble when you realise that you didn’t include the ongoing costs associated to leasehold properties when calculating the yield.

7) The Freeholder

The problem with leasehold is that it’s more restrictive, because you are effectively renting space from another landlord (the freeholder). So the value of your investment is only as good as the freeholder. However, bear in mind, freeholders can change, and you may get lumbered with a dud.

I’d actually go one step further and say a leasehold is only as good as all its leaseholders, which means there are suddenly a lot more moving parts, and therefore greater margin for failure. If you end up with a bag of idiots… painful. Painful.

8) Leasehold properties can be more problematic

Generally, there are potentially ‘all sorts’ of extra problems that come with leasehold properties.

My final thoughts…

I liked Kate’s response, because it was pretty much inline with my sentiments. Although, I’m more pessimistic about leasehold properties than she appears to be.

While Kate doesn’t directly answer the question of whether leaseholds are a good (or bad) BTL investment, she does highlight key areas of concern, which you don’t encounter with freehold properties. So you can make of that what you will and draw your own conclusions.

Personally, I’d rather shove my money into a Savings Account (where money has gone to die for the past decade) than mixing with leaseholds. The restrictions, extra ‘ongoing’ costs and all the communal politics that often pop up, it’s just all too much for me. The first day you get a leak from the flat upstairs is the day you regret ever being a leasehold landlord!

Plus, the idea of ‘renting’ someone else’s land doesn’t go down well with me. It’s probably a egomaniac thing. Another one for my therapist.

I know a mega buttload of landlords own leasehold properties, which is why this blog post might cause unwelcome irritations, just like a 2-dollar hooker.

Maybe you’re a leaseholder, and you might be sitting there thinking I’ve made it sound a lot worse than the reality is… while you’re polishing dust off your Patek Philippe timepiece. That might be true in many cases, but I’d bet my left nutsack on the fact that the majority of those landlords are benefiting so well because they purchased during a time it made sense (i.e. donkey years ago). In today’s market? The odds seem boldly stacked against leaseholds. But to clarify, all the points mentioned are only aspects to be aware of, and mostly *my* reasoning for staying clear, and I’m not saying leaseholds can’t be fruitful investments.

That said, I have a feeling that many new landlords naively opt for leaseholds because they fixate on the lower ‘cost of entry’, while ignoring the overall complications and running costs! That can be fatal. So if you take away anything from this blog post, let it be this: 1) Physically, I’ve aged extremely well 2) Leaseholds generally come with additional costs and politics, so do the proper math before biting the bullet.

Finally, thanks to The Faulkner for the ride (which she has no idea she was a part of)!

As always… thoughts, opinions, shared experiences.. all welcome! xoxo

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23 Comments- Join The Conversation...

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max 20th April, 2017 @ 06:46

I have a number of properties and the only one I have a problem with is the leasehold one. It has been a nightmare.
- communal politics
- a lease that says no pets that the ground landlord enforces
- a lease that says no sharers
- Managers who employ expensive contractors, risk assessment consultants before doing anything, requiring me to pay for other peoples flats as windows are a communal charge
- a management company that won't allow building work done before 9 in the morning
- not being allowed to have anything outside the flat even though only flat on the floor due to fire regulations
- complaints from other occupants in the building about lifestyle issues
- annual tree inspections in the communal garden on trees which have TPO's
- large management costs

etc etc

When I bought the long leasehold flat I thought no more problems with roof etc instead I receive constant reports from consultants on minor issues. Leasehold never again.

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Grumpy 20th April, 2017 @ 07:22

Off thread but this currently boiled my piss....

Went through a broker to remortgage a bldg with 5 flats in it. Owned by my company.

To cut a long story short, £1400 in fees, then I get the legal paperwork.

snook in the small print the mortgage company not only want the mortgage secured on the actual property (as expected) but they then want it personally guaranteed on my own house !!!
WTF they bleat on about all the fees , higher interest rates etc because of the "extra risk associated with commercial mortgages..." then want personal guarantees.

I can sense a court case coming on to get my fees back.

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DingDong 20th April, 2017 @ 07:40

My first 2 were leasehold, just over 10 years ago. I spent the last few years selling those and buying freehold. It was useful having a flat in zone 2 in London, and I certainly couldn't afford a house in that location. Very pleased to have got rid of those now.

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Jane 20th April, 2017 @ 08:06

I have always opted for 'Share of Freehold' properties, ideally where the blocks are self managed so the owners can be masters of their own destiny. My bete noire is managing agents, who seem to generally cost a lot of money to do as little as possible.

A small block of flats with like minded owners can work really well, there just has to be a willingness to roll your sleeves up and get involved, and be open minded to everyone's views.

That said, freehold is best!!!

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John Larmour 20th April, 2017 @ 08:10

My dear boy, one has staff to dust one's Patek Philippe timepieces and other things! I have several leaseholds and a lot depends on managing agent, as it saves me having to worry a lot about maintaining outside and common areas. If the sums add up then still worth investment.

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Sal 20th April, 2017 @ 08:22

We have a LA leasehold flat. It's a nightmare as the City Council can charge whatever they like for communal area maintenance and repairs. The Council buys in a Company to manage all its building work. There is no one employed by the Council who has any building management knowledge. The Scrutiny Panel know nothing about Building Management everything the management company puts forward is agreed. Asset Mamagement plans are followed by the bought in company whether work needs doing or not. Only large building firms tender for projects and the costs are huge - e.g. Replacement of a concrete staircase (which didn't need replacing - confirmed by a qualified surveyor) cost £30,000.00 when the leaseholder was quoted £3000 from a reputable local company. £2000 charged to an elderly leaseholder to replace a hot water cylinder. Leaseholders are unable to use their own contractors for communal work and are unable to opt out of the work even when it's been proved that it doesn't need doing. The contractors carrying maintenance work e.g. redecoration projects employ people who carry out shoddy work - they don't care because it's Council property. Only a small percentage of the work undertaken is inspected.
Leaseholders don't know how much any bills are actually going to be until the end of the year. The Council has a Homeowners Team (which we are charged for) that knows nothing about building work and can't answer questions until they have spoken to the Management firm. Leaseholders are not allowed to speak to the Management firm directly. The Council's finance software isn't able to generate credits to accounts (apparently) and so we have to remember if we have anything owing to us from the previous year, request a refund, and the staff have to deduct it manually!!!!

My advice is don't buy leasehold until you have researched the costs fully. Don't buy anything LA owned that is in a large block (high rise or group of flats) unless the Council doesn't charge leaseholders for communal area maintenance (some don't apparently). You will be charged an equal percentage whether the work affects your property or not e.g. A leaseholder was charged an equal percentage for a new lift that did not serve his flat but was in the block that his flat is part of.
We have a Leaseholders Association which is trying hard to resolve issues but it's an uphill struggle. I just hope we can sell our flat as soon as the Council take down the scaffolding outside the window which is going to be up for the best part of a year!

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The Landlord Avatar
The Landlord 20th April, 2017 @ 09:18

@max
Yessss, that's EXACTLY what I'm talking about (I'm not enthusiastic about your dilemma, just the fact I'm not completely wrong). You literally flagged all the issues (plus more) discussed!

Thanks for sharing Max!

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The Landlord Avatar
The Landlord 20th April, 2017 @ 09:23

@Grumpy
Oh man, I wish I could cool down your piss!

Is the requirement of personal guarantees normal (or at least, not unheard of) when it comes to commercial mortgages (not an area I've dabbled in personally)?

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The Landlord Avatar
The Landlord 20th April, 2017 @ 09:29

@DingDong
Yeah, if you buy in central, you generally have no choice but to go leasehold!

Pleased to hear you're pleased about doing the old switcheroo (not surprising though)! :)

Thanks for sharing!

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The Landlord 20th April, 2017 @ 09:36

@Jane
Ooooh... Share of Freehold! Good point.

The problem is, 'Share of Freehold' properties aren't as easily or regularly available. But I do agree, they are a better solution for buying a flat in a block, at least in terms of ownership.

But again, it doesn't eliminate the communal politics that could occur. And, "willingness to roll your sleeves"... you lost me already haha.

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The Landlord 20th April, 2017 @ 09:38

@John Larmour
Haha, you literally reminded me of the movie 'Coming to America' with Eddie Murphy, where he had staff to bath him and polish his...

Good point well made.

"If the sums add up then still worth investment."

No doubt!

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The Landlord Avatar
The Landlord 20th April, 2017 @ 09:44

@Sal

Holy moly!!! What a pickle.

Thanks for sharing. Your comment alone is something everyone that's contemplating buying a leasehold should read! Great advice from someone that's unfortunately going through the struggle!

Hope you manage to get rid of it asap!

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Grumpy 20th April, 2017 @ 21:50

Landlord,

My point to the ejit brokerage is why the fck would I pay the higher interest for commercial rates plus fees of about 2% when in the end they want a personal guarantee. I might as well just remortgage my own home for a fraction the costs.

First mention of it was in papers sent to my solicitor.

Anyone wanting to avoid the new tax rules and buy with a company ..... be warned!

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The Landlord Avatar
The Landlord 20th April, 2017 @ 22:08

Oooooh, I'm with you!!!

Blimey, they snuck that into the papers without prior notification? That is... criminal!

PULL THE PLUG ON IT!!

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Gary T 21st April, 2017 @ 12:15

Here's a couple of leasehold problems we've encountered.

LH Property 1, ground rent doubling ever 10 years (for first 50 years of a 125 year lease).
Ground rent starting at £350 pa. Work that 50 years forward and see what that would end up as. Plus also a charge of (minimum!) £100 per new tenancy.

LH Property 2, in a block of approx 40 flats. Property maintenance seems to have fallen way behind, minimal sinking fund £50 pa per flat. Flat roof and a whole load of other things needing to be done. Bottom line £8000 per flat maintenance charge about to hit.

Suffice to say, we didn't proceed with either property.

We do however have 3 leasehold properties doing very nicely thanks with very good managing agents. LH can work well but you need to do your homework. That said would definitely go for FH if money was no object.

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The Landlord Avatar
The Landlord 21st April, 2017 @ 12:25

@Gary
Thanks for sharing, appreciate it!

I've heard of so many homeowners (not just landlords) getting swallowed alive by the increasing ground rents. Getting leases with reasonable caps is crucial!

I think a lot of leases come riddled with the issues you encountered, and that's the problem.
Definitely agree, homework is key with leaseholds!

Glad to hear it's working out for you!

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Tom Charrier 21st April, 2017 @ 20:20

All good points.

It's the lack of control that gets me.

I have a leasehold flat, a pipe in the flat above sprung a leak, so I spoke to the live in caretaker and requested he gets on the case.

His response: 'I'll write a letter to the flat above" WTF?! You live IN the building. I was expecting a "I'll go round right away" at the least, or even better some SWAT style door kicking action to get access and get it fixed there and then. "No it's leaking now, it really needs to be found and fixed asap. How quickly can you get it resolved?' I responded politely.
"Oh no there's really not much I can do...it could take up to a year to fix" comes his response!

The conversation deteriorated from there.

Cue long period of trying to a) get hold of the tenant, b) trying to get them to contact their managing agent, c) trying to get the agents to get the landlord to sort it, d) waiting and watching the damage spread.

Fortunately my tenant didn't decide to piss off or worse stop paying.

Ultimately it was an insurance claim on the management company's insurance, but of course that price is included in the service charge so I paid one way or another.

Moral of the story- leaseholds come with the frustration of not being in control of everything you need and want to be.

Pursue with your eyes open!

(I should add however: the flat is in central Manchester, so even with potential maintenance headaches I'm not selling- it makes too good a return, and Manchester property prices are houng in only one direction)

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Nicky 25th April, 2017 @ 05:54

Please can anyone help? I am looking into purchasing an over 55s flat for my own future use and want to know if I could rent it out to an over 55 tenant in the foreseeable future. My offer has been accepted but I don't want to purchase if renting is not an option. Where could I found out this information as the estate agent is rubbish and very unsure?

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Paul Barrett 25th April, 2017 @ 07:11

No you won't be able to do this!
Don't trust the EA
Find out from the block owner
There are usually restrictions as to what is allowed for occupants.

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Benji 25th April, 2017 @ 07:54

@Nicky,

Check the lease.

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The Landlord Avatar
The Landlord 25th April, 2017 @ 08:22

@Tom Charrier
Nice comment, and another good example of how leaseholds can be a pain in the ass.

Haha @ SWAT style door-kicking! I'm sure most landlords have wanted to do that before!

Noted about leasehold flats in central metropolitan areas and rocketing prices. No doubt, if anyone purchased a prime piece of real estate at the right time... the added headaches are still worth it.

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Tom Charrier 25th April, 2017 @ 09:02

@The Landlord, one thing that has happened- the absolutely dire and borderline negligent management company were ousted via a Right to Manage process, and a new management company engaged to take their place.
Yes there are the same set of politics at play and the owner/resident directors squabble over what to spend money on etc, but on the positive side we now have a board of directors who's vested interest is the decent upkeep of the building.
So there is hope for those who are frustrated at their management companies if the service is crap. It was a very involved, lengthy and expensive process ('crowdfunded' by owners in the building) but it worked.

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Simon Johnson 12th May, 2017 @ 08:42

Great Article...Absolutely fantastic!!!

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