What are the pros and cons of a leasehold property?
As with all properties, leasehold properties come with pros and cons.
Pro #1 – Lower cost
Leasehold properties are often cheap. That’s because you don’t own the land. This can make them an affordable option for some people.
Pro #2 – Smaller mortgage
Since you don’t have to buy the land for a leasehold property, you'll pay less, and your mortgage will be smaller. There are extra costs, like ground rent, but we’ll cover that in a moment.
Pro #3 – Changes in land value don’t impact you
Leasehold properties offer a level of protection against fluctuations in land value. Since you don’t own the land, you don’t care as much about what happens to the price of the land.
Because of this, some people will see leasehold properties as lower hassle.
Now let’s talk about the cons.
Con #1 – Increasing ground leases
The biggest issue with leasehold properties is that the ground rent goes up.
Sometimes a person will look at buying a leasehold property, and the ground rent looks cheap. But then the ground rent goes up and becomes expensive.
Usually, the ground rent gets reviewed every 7-21 years.
And the kicker is that the ground rent is usually tied to the value of the land. That means if the property market goes crazy and the land doubles in value, so does your rent.
Many investors have to pay way more than they thought they would at the start.
For instance, there was recently a case in Auckland where the ground rent on a leasehold property started at $4.5k a year.
After the landlord reviewed the ground rent, it shot up to $16.6k. That’s an enormous $12,000 increase!
Put in a weekly amount; that's an increase from $86.50 to $320 per week. Oof!
Con #2 – Hard to sell and no capital growth
Selling leasehold properties can be challenging.
Since the ground rent can go up (and you don’t own the land), few people want them.
That means leasehold properties often take a long time to sell. And in the meantime, you still need to pay the ground rent.
Leasehold properties are also less likely to go up in value. That’s because they have a finite shelf life. With a freehold property, you own the land forever. But, with a leasehold, you have to give the land back at some point.
So leasehold properties get less desirable over time as the time left on the lease dwindles.
Con #3 – Limited control
If you buy a leasehold property, you will often have limited control over the land.
You might be unable to make changes or add extra dwellings to the land, although this depends on the terms and conditions of your contract.
Con #4 – Need a larger deposit to get a mortgage from the bank
Banks need you to have a larger deposit before they lend you money for a leasehold property.
This is often 50%.
So while the property might look cheap, you still need a sizeable deposit to buy one.
Do the pros outweigh the cons
Some property buyers will decide that leasehold is the right fit for them.
But most property buyers should stay away from leasehold properties. They are cheap for a reason and are generally not a good long-term investment.