When you are a landlord looking at properties to rent out to tenants, also known as buy-to-let or buy to rent, you will usually come across two main types. The first is a freehold property, which is more commonly seen in houses in suburban or rural areas, and the second is a leasehold, which is usually more popular in urban areas.
As cities continue to expand, more landlords who want to choose to buy to rent options will likely want to use the leasehold option when expanding their portfolios. As is the way with many rental options, there are multiple areas to consider, and here, the pros and cons of leasehold properties for landlords aiming to rent them out will be looked at.
What is a Leasehold Property?
In simple terms, a leasehold property is an ownership type where the buyer (the landlord) owns the property for a set period under a lease. They do not, however, own the land that the property stands on. When it comes to freehold v leasehold, the main differences is that with freehold, the landowner will own both the land and the building, allowing them to make changes to both. This is one of the reasons why leaseholds are more common in flats, as these do not have land surrounding each individual flat or apartment.
The terms of the lease with a leasehold will usually be decades, with some even being 999 years, and as the lease shortens, the value of the property decreases.
Advantages of Leaseholds
So, if you are new to being a landlord, or you are eager to expand into flats, what are some of the pros of leaseholds?
Lower Initial Purchase Price
The good news is that the initial cost of such a property is low, especially when you compare it to freehold properties. Thus, the bar to entry is lower and the return on investment is higher, making a leasehold a great option if you want to build your property portfolio.
Shared Maintenance and Rules
A common concern that many landlords have is their share of responsibility for repairs on a property that they rent out. With a leasehold, any major structural repairs, such as the upkeep of communal areas, are usually the responsibility of the freeholder or the management company, reducing most of the direct maintenance obligations. So, any landlord insurance will likely be cheaper, too!
In a similar vein, the same agent or company will also be responsible for things such as the rules of the building relating to noise, pets, and decoration, which can help ensure that the property you buy will retain its value long term, and also means you don’t have the legal obligation to oversee these areas.
Better Amenities
Many leasehold properties will include additional amenities, which can make your apartment or flat more appealing to potential tenants. Many leasehold properties have communal features like gyms, security, and even concierge services, which add security and will appeal to certain types of tenants.
Potential Disadvantages of Leaseholds
For the sake of clarity, for all landlords who are considering buy-to-rent with a leasehold, there are some potential issues that you need to know about.
Restrictions in Lease
Landlords who opt for a leasehold property are likely to be restricted by the terms of the lease itself, as well as having to pay ground rent, service charges, and also needing to pay for the maintenance of communal areas. For example, if a landlord has a three-bedroom flat under a leasehold, it may not be possible for subletting to occur. So, there will be a restriction on who may rent the space, which may make the tenant occupancy harder to fill.
Reduction in Value
As mentioned before, one of the potential disadvantages of leasehold properties is that as the leases shorten, the value of the property drops. With buy-to-let options, this can mean a decrease in rental income for landlords. Extending the length of the lease can be expensive, and properties that have less than eighty years on their lease are going to be harder to get a mortgage for.
Resale Issues
In a similar vein, if you are aiming to sell a leasehold, if there are fewer than eighty years on the lease, you may struggle to get your initial asking price. Buyers are likely to be deterred by the lease length, the additional cost of ground maintenance fees, and the ground rental terms, which can restrict any alterations that can be made to update the space, to make it more appealing to the modern rental market.