BUYING A LEASEHOLD PROPERTY: CAN I RENT IT OUT?
Alexandra Ventress
November 27th 2023
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When you are buying a leasehold property, you are in effect buying the right to live in the building for a set number of years. Exactly how many years will depend upon the lease term, which could be valid for years, decades or occasionally even centuries.
However, the purchase of leasehold property does not include the land that it is built upon, this belongs instead to the freeholder. Once your lease runs out, the property reverts back to the freeholder.
In this blog post, we will be taking a closer look at how leasehold houses work, whether you should extend your lease, and whether or not renting out a leasehold property is a good investment.
As an investor, it is critical to know the difference between a leasehold and a freehold property. If a property is freehold, it means that you own both the property as well as the land that it is built upon until you decide to sell. If the property is a leasehold, then you only own the right to live in the building until the lease term runs out, plus you may also be subject to additional charges, such as ground rent or service charges.
Types of leasehold
More often than not, you may find that properties such as flats and apartments are leasehold, but you can also have houses that are part of an estate that are leasehold properties.
In large cities, you may often find that flats and apartments are sold on a leasehold basis. This is because the buildings are often owned by businesses that retain the freehold.
Why are properties leasehold
As we have previously mentioned, the reason why properties are often sold as leaseholds is due to the communal spaces or facilities they often share. It would be impractical for each property owner to half a piece of communal spaces or amenities, such as halls, lifts, and gyms, so instead a freeholder oversees maintenance.
What is a sinking fund?
A sinking fund is a set-up in order to cover any major works or emergencies that may occur in a building. This means that if the roof needed repairing or the building required a new boiler, then the sinking fund would be used. It is a wise idea to have your solicitor check for any building work that may be scheduled and confirm whether the sinking fund has enough funds to cover it.
As with any investment opportunity, there are some aspects of buying a leasehold property that you will need to consider carefully. Below we take a closer look at some of the disadvantages of buying a leasehold house.
Ground rent
One of the first disadvantages that people may think of when they talk about leasehold properties is ground rents.
Once a real disadvantage to leasehold ownership, ground rents have since been effectively eliminated for all new lease agreements in England and Wales, thanks to the Leasehold Reform (Ground Rent) Act 2022.
Any remaining ground rents are now either peppercorns or are non-existent.
Service charge
While ground rent may no longer pose a challenge for leasehold property owners, service charges can do. A service charge is a rate you will pay in order to cover the cost of maintenance for the building and any communal areas within. Exactly how much you will pay will vary from building to building, and they have been known to increase with little warning.
Before purchasing a leasehold property, you should always request a detailed breakdown of service charges as well as past records in order to get an idea of the costs you may be subject to.
Permission fees
When owning a leasehold property, you could find that if you wish to make changes to it, such as remodelling the kitchen, you may have to face a permission fee that you would need to pay to the freeholder.
These fees can be expensive, even if you only wish to make minor changes to the property, so you should ask about potential permission fees upfront.
Lease length
Lease term is another factor that investors should look into when purchasing a leasehold home. As long as there are plenty of years left on the lease, then there should be no issue. However, if you have a short lease, or the lease drops below 80 years, then you may not only struggle when it comes time to sell the property, but you may also struggle to secure a mortgage on it.
If this is the case for you, you may wish to look into extending the lease, however, this can be complex to do, so it is always best to consult a solicitor. A lease that has below 80 years left on it brings with it a significant escalation of extension costs. This is because the marriage value is then applicable (a name given to the increase in value that is generated by granting a new lease).
If you are considering renting out a leasehold flat, then you should keep an eye out for those with a long lease in order to avoid the process of lease extension.
Difficulty selling
Another challenge you may come across with the ownership of a leasehold is selling may be more difficult than you originally anticipated. The issues we have discussed here can all put potential buyers off. Furthermore, some leasehold buildings come with a clause that requires the freeholder’s approval of a potential buyer before they purchase, which can make selling even harder.
Thankfully, if you are interested in buying a flat or house with a leasehold, there are steps that you can take that help to mitigate the risks. Below are some avenues you may wish to explore if you are interested:
Extending the lease
If you have found a property with a short lease that you are interested in, then you should not let this stop you. You may want to look into the options surrounding extending the lease.
By extending the lease, you are able to make the property easier to mortgage, but also more attractive for when you decide to sell. There has been recent legislation introduced which means if an agreement has been reached to extend the lease, then the ground rent will be zero.
However, you may need to pay a premium to the freeholder in order to extend.
Legal advice
Professional advice is strongly advised when it comes to dealing with leaseholds due to their incredibly complex natures.
As a buyer, a solicitor will be able to help you fully understand your rights, the legislation surrounding the leasehold and the terms of the lease. If you are interested in buying the freehold or lease extension, then they will also be able to help you navigate this.
Negotiation
You can also use these potential pitfalls as a point of negotiation. This can be an especially good idea if you are dealing with an older property where the terms set out in the lease may not be as attractive as a newer lease.
You may be wondering “can i rent out my leasehold flat”. The answer to this lies in the terms of your lease. If you have bought a leasehold property with the view of renting it out, or if you live in one and hope to turn it into a rental, then you will need to carefully check the terms of the lease to see if this is permissible.
In order to let out your leasehold home you will usually need permission from the freehold owner. If you are obligated to seek permission but fail to do so and rent out your property regardless, then the freeholder may take legal action against you and repossess the property.
If you have found a leasehold flat that you are interested in purchasing, you should not let the leasehold put you off. Leases are not generally an issue, it is only bad leases that cause problems. And even if the property comes with a less favourable lease, there are still routes that you can take to lessen the severity.
A leasehold flat can be a great investment option, as they also bring with them their own positives as well, such as upkeep ans repairs in communal areas will not be your issue, and certain terms in your lease will mean that issues like noisy neighbours will e left to the freeholder to deal with.
Whether you can rent out a leasehold property via subletting will once again depend upon the terms of the lease. Some leases do allow for subletting but require you to only let as a single-family residence. So if you were to let out your property to friends or colleagues who are not living as a family, then you would be in breach of contract.
Investing in a leasehold property can be a great investment choice for those who are looking to gain a higher return on investment with their rental properties. Data from industry experts suggest that a leasehold property is able to generate a significantly higher return on investment than freehold properties, being able to gain around “15-20% per year.” This is due to leasehold properties requiring a lower upfront level of investment compared to their counterparts because the leaseholder is only paying for the right to use the property for a set number of years.
When you are buying a leasehold property, you are in effect buying the right to live in the building for a set number of years. Exactly how many years will depend upon the lease term, which could be valid for years, decades or occasionally even centuries.
However, the purchase of leasehold property does not include the land that it is built upon, this belongs instead to the freeholder. Once your lease runs out, the property reverts back to the freeholder.
In this blog post, we will be taking a closer look at how leasehold houses work, whether you should extend your lease, and whether or not renting out a leasehold property is a good investment.
As an investor, it is critical to know the difference between a leasehold and a freehold property. If a property is freehold, it means that you own both the property as well as the land that it is built upon until you decide to sell. If the property is a leasehold, then you only own the right to live in the building until the lease term runs out, plus you may also be subject to additional charges, such as ground rent or service charges.
Types of leasehold
More often than not, you may find that properties such as flats and apartments are leasehold, but you can also have houses that are part of an estate that are leasehold properties.
In large cities, you may often find that flats and apartments are sold on a leasehold basis. This is because the buildings are often owned by businesses that retain the freehold.
Why are properties leasehold
As we have previously mentioned, the reason why properties are often sold as leaseholds is due to the communal spaces or facilities they often share. It would be impractical for each property owner to half a piece of communal spaces or amenities, such as halls, lifts, and gyms, so instead a freeholder oversees maintenance.
What is a sinking fund?
A sinking fund is a set-up in order to cover any major works or emergencies that may occur in a building. This means that if the roof needed repairing or the building required a new boiler, then the sinking fund would be used. It is a wise idea to have your solicitor check for any building work that may be scheduled and confirm whether the sinking fund has enough funds to cover it.
As with any investment opportunity, there are some aspects of buying a leasehold property that you will need to consider carefully. Below we take a closer look at some of the disadvantages of buying a leasehold house.
Ground rent
One of the first disadvantages that people may think of when they talk about leasehold properties is ground rents.
Once a real disadvantage to leasehold ownership, ground rents have since been effectively eliminated for all new lease agreements in England and Wales, thanks to the Leasehold Reform (Ground Rent) Act 2022.
Any remaining ground rents are now either peppercorns or are non-existent.
Service charge
While ground rent may no longer pose a challenge for leasehold property owners, service charges can do. A service charge is a rate you will pay in order to cover the cost of maintenance for the building and any communal areas within. Exactly how much you will pay will vary from building to building, and they have been known to increase with little warning.
Before purchasing a leasehold property, you should always request a detailed breakdown of service charges as well as past records in order to get an idea of the costs you may be subject to.
Permission fees
When owning a leasehold property, you could find that if you wish to make changes to it, such as remodelling the kitchen, you may have to face a permission fee that you would need to pay to the freeholder.
These fees can be expensive, even if you only wish to make minor changes to the property, so you should ask about potential permission fees upfront.
Lease length
Lease term is another factor that investors should look into when purchasing a leasehold home. As long as there are plenty of years left on the lease, then there should be no issue. However, if you have a short lease, or the lease drops below 80 years, then you may not only struggle when it comes time to sell the property, but you may also struggle to secure a mortgage on it.
If this is the case for you, you may wish to look into extending the lease, however, this can be complex to do, so it is always best to consult a solicitor. A lease that has below 80 years left on it brings with it a significant escalation of extension costs. This is because the marriage value is then applicable (a name given to the increase in value that is generated by granting a new lease).
If you are considering renting out a leasehold flat, then you should keep an eye out for those with a long lease in order to avoid the process of lease extension.
Difficulty selling
Another challenge you may come across with the ownership of a leasehold is selling may be more difficult than you originally anticipated. The issues we have discussed here can all put potential buyers off. Furthermore, some leasehold buildings come with a clause that requires the freeholder’s approval of a potential buyer before they purchase, which can make selling even harder.
Thankfully, if you are interested in buying a flat or house with a leasehold, there are steps that you can take that help to mitigate the risks. Below are some avenues you may wish to explore if you are interested:
Extending the lease
If you have found a property with a short lease that you are interested in, then you should not let this stop you. You may want to look into the options surrounding extending the lease.
By extending the lease, you are able to make the property easier to mortgage, but also more attractive for when you decide to sell. There has been recent legislation introduced which means if an agreement has been reached to extend the lease, then the ground rent will be zero.
However, you may need to pay a premium to the freeholder in order to extend.
Legal advice
Professional advice is strongly advised when it comes to dealing with leaseholds due to their incredibly complex natures.
As a buyer, a solicitor will be able to help you fully understand your rights, the legislation surrounding the leasehold and the terms of the lease. If you are interested in buying the freehold or lease extension, then they will also be able to help you navigate this.
Negotiation
You can also use these potential pitfalls as a point of negotiation. This can be an especially good idea if you are dealing with an older property where the terms set out in the lease may not be as attractive as a newer lease.
You may be wondering “can i rent out my leasehold flat”. The answer to this lies in the terms of your lease. If you have bought a leasehold property with the view of renting it out, or if you live in one and hope to turn it into a rental, then you will need to carefully check the terms of the lease to see if this is permissible.
In order to let out your leasehold home you will usually need permission from the freehold owner. If you are obligated to seek permission but fail to do so and rent out your property regardless, then the freeholder may take legal action against you and repossess the property.
If you have found a leasehold flat that you are interested in purchasing, you should not let the leasehold put you off. Leases are not generally an issue, it is only bad leases that cause problems. And even if the property comes with a less favourable lease, there are still routes that you can take to lessen the severity.
A leasehold flat can be a great investment option, as they also bring with them their own positives as well, such as upkeep ans repairs in communal areas will not be your issue, and certain terms in your lease will mean that issues like noisy neighbours will e left to the freeholder to deal with.
Whether you can rent out a leasehold property via subletting will once again depend upon the terms of the lease. Some leases do allow for subletting but require you to only let as a single-family residence. So if you were to let out your property to friends or colleagues who are not living as a family, then you would be in breach of contract.
Investing in a leasehold property can be a great investment choice for those who are looking to gain a higher return on investment with their rental properties. Data from industry experts suggest that a leasehold property is able to generate a significantly higher return on investment than freehold properties, being able to gain around “15-20% per year.” This is due to leasehold properties requiring a lower upfront level of investment compared to their counterparts because the leaseholder is only paying for the right to use the property for a set number of years.
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