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It’s important to know the differences between freehold and leasehold properties when buying property. Essentially, freehold and leasehold are types of estates. Here is the difference;
Freehold property
If you purchase a freehold property, you will own the home, the land it is built on, and you will have the right to live there for as long as you please. You can make moderations to the property within restrictions of the law and planning restrictions. You may need permission to make structural changes, particularly with listed buildings (old buildings). Most houses are sold freehold. Flats can be sold freehold, but very rarely; they’re usually leasehold.
Leasehold property
If you buy a leasehold property you are actually buying the rights to live in a property for a set period of time. You won’t actually own the property, or the grounds it is situated on. Most flats are leasehold; with the lease, it means you are obligated to pay ground rent to the freeholder. The ground rent will cover the costs for communal maintenance repairs. The lease should stipulate how the service charge is worked out, and how it is divided between the other leaseholders. It’s important to calculate all these costs before committing to a leasehold property, as you may not have budgeted for the additional costs.
Once the set period in the lease expires, the ownership of the property is given back to the land owner. Most leases are roughly 99 years; however, you can get an extension. If anyone is buying a leasehold property, it is important to find out how long the lease is for as it will affect the value of the property.
Why do people get leasehold properties? Well, because most flats are leasehold, and it means everyone living within the same building has to split maintenance costs in respect of the common parts of the building and the communal areas.
It is possible to extend the leasehold to up to 999 years, and you can actually purchase the freehold, but at a cost.
Pros and cons of both
The question of whether to own freehold or leasehold property seems a perennial one, with pros and cons shifting with market cycles and new trends. Here, we examine the issue from the perspective of both a home owner and investor, and see how both tenures perform in rising and falling markets as well as in collective sales.
The chief attraction of 99-year leasehold property is that it is typically priced lower than a comparable freehold property. As a result, they are popular as entry-level private properties..
For investors, leasehold properties usually offer a higher rental yield because of their lower capital cost. However, the higher yield merely compensates the owner for the decaying lease.
One of the more apparent disadvantages of owning a 99-year leasehold property is that the length of the lease is contracting daily. All else being equal, this would result in falling property value. However, certain external factors could slow the decline in value, such as if the property is sought after by tenants or buyers. This could be due to a prime location, improving infrastructure, or good amenities or popular schools in the vicinity.
A key benefit of owning freehold real estate is that the land value does not generally depreciate in the long term. Although all properties are subject to market fluctuations, the price of freehold land tends to be more stable than that of leasehold land over time. However, the value of a freehold property could still decrease over time due to the depreciating value of the ageing building. Over the long term, while the value of freehold land may increase or remain little changed, the value of the building would decline.
Some developers looking to acquire residential land for development may also prefer freehold land to ageing 99-year leasehold property because freehold land would not require the payment of a hefty premium for extending the lease.
For all these reasons, freehold residential properties are generally priced higher than 99-year leaseholds. The price range of freehold non-landed properties is also wider than that of comparable leasehold properties. The majority of high-end residential properties are freehold.
For investors, one disadvantage of freehold property is the lower rental yield, a function of the higher cost of the property. When we look at the price performance of freehold and leasehold properties; although freehold properties are usually priced higher than their leasehold counterparts, their rate of appreciation does not always outperform.
In comparing freehold and leasehold residential properties, there is no conclusive evidence to show that one is better than the other. Ultimately, the decision boils down to budget and preference.
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