You know what… I suddenly realised that I do not actually talk a lot about the business I am in – Property Investing and Sourcing. I call myself Mum-in-business but you the readers do not get to see me doing my business things. You generally get my musings on life and the thought processes behind doing bigger, better things. Well, this section of the website (surprisingly called Property) will be dedicated to talking about property deals I come across that seem interesting (to me, at least!).
Well here goes…
Over the last week or so, I have been in talks with the owner of a flat with regards to purchasing it from him. Now if you know anything about flats, you will be aware that they are mostly leasehold. Which means that you never really own the flat, you rent the flat from the freeholder for a massive upfront cost and hopefully, fairly small rental payments. However, those fairly small rental payments can be pretty high as well. I have heard of people paying about £200 a month in service charges and ground rent. Pretty steep, I think! particularly as it is something that you think you own.
To extend the lease or not?
The flat is in pristine condition, at least nothing a quick dusting would not sort out and at the price I negotiated with the seller, it could generate net income (the money left over after costs like insurance, mortgage etc) of £250 – £300 each calendar month. That is dependent on the mortgage interest rate ( which I will be trying to get as low as possible, of course!).
So not bad for an investment, but there are 69 years left on the current lease. OK, so by the time the lease runs out, I may well be in heaven so why does it matter? Unfortunately, it matters a lot to the banks who would be sending the mortgage my way. They prefer to see a lease of 70 years and above – Not all banks but quite a few. The other thing is the management company that manage the lease for the freeholder – the person who actually owns the land this little flat is built on. Having done my due diligence, I am getting the notion that this particular firm are not great to work with. So, do I want to get in bed with them, so to speak?
The question now becomes, how much is it really worth to me? Would it not be easier to buy a freehold house without all the various encumbrances of extending the lease and so on and so forth… OR is there an opportunity there? And I definitely want to take advantage of any opportunities:-).
The thing about leasehold flats is that extending the lease is generally best to do before the 80 year mark. After the 80 year mark, suddenly everything gets considerably more expensive to renew and extend. There is something called the ‘marriage’ value that is added to the cost of renewing the lease.
What is the marriage value? you might ask…
This is where you pay the landlord (freeholder) a 50% share of the profit you gain by having a flat with a really long term lease. For instance, if your flat with its current 70 years remaining is worth £100,000 but then you extend the lease and it suddenly is valued at £140,000, you will have to pay a marriage value of about £20,000 plus some more money to extend the lease. Needless to say, after 80 years, things can get pretty expensive. Also, the less time left on the lease, the higher the amount you have to pay to extend it.
Again, is it worth all that to me? That is the question… I am almost certain of the answer but we will see.
There is so much more to find out about leasehold and in the right circumstances, they can be lucrative. For more information on leases then visit the publicly owned website.
To find out more about what I do, come along to my business site – Buy Property Help. Maybe I can help you or someone you know get your money to work for better returns than any bank can give.
Until the next time