8 Leasehold Restrictions to Watch out for When Investing in Property

For those new to property investment or based overseas the world of investing in leasehold properties can often be confusing and intimidating.

Unlike freeholds, investing in a leasehold means you don’t own the ground the property is built on. Instead, investors agree to lease the land from the development owner.

As such, restrictions may be placed upon the land, and therefore the property, as to how it can be used. This is commonplace when purchasing an apartment in a block and, in theory, it is not a cause for concern.

Where investors need to be careful is in identifying exactly what these restrictions are and how they could impact your plans for letting out the property.

With that in mind, we’ve put together a list of leasehold restrictions you should watch out for when investing in property.

1. Letting the Property

couple-home-being-handed-keysIt may seem crazily obvious, but the first thing you’ll want to check when it comes to buying a leasehold property is that there aren’t any restrictions on letting out the property.

This is a trap that investors fall into time and time again when buying leasehold properties at an auction, thinking they can let them out, and discovering otherwise. Of course, it goes without saying that a property you can’t let out isn’t much use to an investor.

2. Property Charges

If you’ve done any research into investing in leasehold properties before, you’ll know that there are a few monthly charges you need to understand the terms of.

  • Ground Rent – As you’re only leasing the land your property is on, you’ll need to pay ground rent to the owner of the freehold (usually annually). Aside from knowing how much you’re going to have to pay, take some time to identify how much ground rent can increase in the future. A good leasehold should have caps built in.
  • Service Charge – If you purchase a leasehold in building with communal areas, the maintenance of these will be managed by the freehold owner for an agreed service charge. Again, confirm this cost before investing and find out if this could increase in the future.
  • Sinking Fund – As part of your leasehold, you may be required to contribute to a sinking fund. A sinking fund is a pot of money reserved for unexpected maintenance and repairs, such as replacing the roof. Sinking funds are good as they spread the responsibility across multiple parties and ensure you aren’t left with a massive bill on your own.

3. Length of Lease

roll-of-measuring-tapeBefore taking on a leasehold property, be sure to check how much time is remaining on the lease. Leases can last as long as 999 years, but most have around 100 years.

The rule here is that the longer the lease the better. Kate Faulkner, a regular on the radio show ‘The Property Hour’ points out that leases with less than 80 years may only be able to be bought with cash. In any case, leaseholds tend to drop in value and saleability around the 85-year mark.

Of course, you can extend the length of a leasehold, but this can be an additional cost.

4. Who You Can Rent To

Assuming you’ve confirmed you can indeed let out your leasehold, the next thing you’ll want to check is if there are any restrictions on the type of tenant you can let to.

If you’re buying in a city with a strong student population, you’ll want to make sure there is nothing in your leasehold that says, for example, the property can’t be rented by students or can only be occupied by single families, as opposed to multiple occupants.

This happened in a luxury Canary Wharf skyscraper, where landlords were stung when they were informed that they could not rent two-bed apartments to unrelated occupants.

5. Serviced Apartments

interior-of-luxuary-apartmentsIn the last decade, short-term rentals of serviced apartments have grown massively in popularity. Now, buying property to be let using websites like Airbnb is a real option for investors, especially in city centres with a strong tourist trade.

Therefore, it’s always worth checking whether your leasehold restricts you from doing this by not allowing short-term lettings.

6. Insurance

As part of your leasehold, you should have some insurance included, most likely to cover things like the building structure.

However, if you plan to let out your leasehold, it is imperative that you read and understand exactly what is covered by this insurance, as you may need your own.

If you don’t, you may find that your property is not insured once you have a tenant in it. Even worse, insurance issues may damage your relationship with your freeholder.

As Marc von Grundherr, Director of Benham & Reeves Lettings, says: “The freeholder can deny the tenant access to the property – which will mean the tenant has a case against the landlord. At worst, the freeholder could be really heavy-handed and forfeit the owner’s lease.”

7. Smaller Details

hand-pointing-to-schematicsWhen it comes to leasehold, the devil is always in the details, so read all the small print carefully. A common restriction is not allowing pets, something that can affect your search for tenants.

Other examples of restrictions in your leasehold could be time limits on when loud music can be played or even not allowing tenants to hang washing out to dry on balconies.

These may not be major considerations, but not abiding by them because you’re unaware of their existence could put your relationship with your freeholder on the back foot.

8. Change is Coming

The final thing to be aware of when it comes to leasehold restrictions is that change is coming.

The Law Commission is proposing changes to make it easier for leaseholders to manage their property. These changes could see a simpler process introduced for leaseholders to gain the right to manage (RTM) their property in relation to maintenance and services.

While these recommendations are still in the early stages of being developed, it’s possible that they will impact on how investors manage leaseholds, so it’s well worth keeping an eye on them if you’re planning to invest in a leasehold in the future.

Finding the Right Leasehold

leasehold-contract-being-signedWhen it comes to investing in a leasehold property then, the first step is to find one that doesn’t go overboard on restrictions.

At Taylor Rhodes, we build property designed for modern investors. That’s why we work with you to identify your goals and provide a leasehold that won’t restrict you.

Get in touch to learn more about our property investment opportunities.