Article Summary

First-time investors and homeowners will come across the terms ‘leasehold’ and ‘freehold’ when looking for their first property, and you may not be familiar with what this entails. In this article, we will explain what each one is, the difference between the two, and which may suit you better.

What is a Leasehold?

If you were to buy a property that was Leasehold, you would effectively be the owner of the property until its leasehold is up. For example, if you were to buy a property that had 80 years leasehold left in 2025, you would be the owner of the property (if you didn’t sell it beforehand) until 2105.

A property with a 999 year leasehold is called a ‘virtual freehold’, as the length of lease is far longer than the norm (which is typically 99 to 199 years). The crucial feature of this is that the ground rent would be a ‘peppercorn’ (token or nominal rent, e.g. £1.00 paid by way of consideration in order to form a legally binding lease contract).

What is a Freehold?

Freehold properties are usually houses, though there are the rare selection of flats and penthouses that are freehold as well. If an investor were to purchase a freehold property, it would mean that they would effectively be the owner of the property and the land it is on, being solely in charge of maintaining the unit – resulting in no ground rent.

What is the difference for an investor?

Leasehold properties can look less appealing to investors at face value, however the benefits of lease years should not be dismissed. Investing in a leasehold property can be a smart financial decision for investors looking for long-term returns in a UK investment.

There are several benefits to buying a leasehold property from an investor’s perspective:

Lower Initial Investment: One of the main benefits of buying a leasehold property is the lower initial investment required compared to buying a freehold property. As the investor is only purchasing the right to use the property for a specific period, the initial cost is typically lower than purchasing the full freehold ownership of the property.

Potential for Capital Appreciation: Leasehold properties can appreciate in value over time, depending on market conditions and the length of the lease. In some cases, investors may be able to purchase a leasehold property at a discount and see a significant increase in value over the lease term.

Regular Income: Leasehold properties can also provide a regular income stream for investors, as they can be rented out to tenants. Investors can benefit from rental income during the lease term, which can help cover the cost of the lease and provide additional returns.

Lower Maintenance Costs: As the landowner typically retains responsibility for maintaining the property, investors can benefit from lower maintenance costs. This can be particularly attractive for investors who are looking to purchase a property as a passive investment.

Flexibility: Leasehold properties can also provide flexibility for investors, as they can be easier to sell or transfer ownership than freehold properties. This can be particularly beneficial for investors who are looking for a more liquid investment or who may need to sell the property before the end of the lease term.

Despite this, there are also some negatives that have to be considered, such as potentially increasing ground rents, which could increase over the course of the lease term. This is particularly problematic for investors who are looking to sell the property in the short to medium-term. Service charges can also be considered a factor as freehold properties do not have any service charge.

A freehold property gives the buyer outright ownership of the land and the unit/building, which can have its benefits and downsides. Here are just a few positives and negatives of investing in a freehold property:

Complete ownership and control: One of the main advantages of buying a freehold property is that the investor has complete ownership and control over the property. They have the freedom to make changes to the property as per their wish, without seeking permission from any third-party.

No leasehold payments: With a freehold property, the buyer does not need to make any payments to a landlord or third-party, unlike a leasehold property where the buyer is required to pay ground rent, service charges, and other fees.

However, there are negatives to owning a freehold property, such as:

A higher upfront cost: The initial cost of purchasing a freehold property is usually higher than that of a leasehold property. This is because the buyer is purchasing the land as well as the building, which can increase the overall cost of the property.

Responsibility for maintenance and repairs: With a freehold property, the buyer is responsible for all maintenance and repair work. This can be expensive, especially if the property is old and requires extensive repairs.

Restrictions on land use: While freehold properties offer complete ownership, there may be restrictions on the use of the land or the building. For example, zoning laws may prohibit certain types of businesses from operating in a specific area.

Potential legal disputes: Buying a freehold property can also lead to potential legal disputes, especially if there are disputes over boundaries or easements. This can be time-consuming and expensive for the investor.

Conclusion

In conclusion, buying a leasehold property can be a smart financial decision for investors looking for long-term returns. The majority of new-build properties feature 250 or 999 year leaseholds, ensuring that the investor is not in any danger of losing any significant value on their property in their lifetime due to leasehold years.

On the other hand, a freehold property can be a great investment despite the downsides. This includes higher upfront costs, maintenance and repair responsibilities, restrictions on land use, and potential legal disputes.

Each of these options presents their positives and negatives, though the negatives of leaseholds are often highlighted despite the overwhelming positives that leasehold properties bring. The majority of problems with the property losing value due to the amount of leasehold years can be eliminated through the purchase of a new-build property, as it will be in your possession safely for your lifetime to benefit from.

To learn about the property investment opportunities above, or to find out more about how property investment works, get in touch with the experts at North Property Group today.