£125k, £13k p/a for 25 years, 107 years on lease

Landlord Discussion
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Hi everyone,

My partner and I have been saving a long while to buy our first investment property together.

We’ve found a deal for a 1-bedroom flat in Bradford city centre for £125,000 with 107 years left on the leasehold.

Comparables in the building sell for £50-60k, however this has a 25-year guaranteed rent contract with a Housing Association which provides supported/assisted living social housing for vulnerable adults, funded by the local council.

The rent is floored at £13,000 per annum, with annual reviews in line with CPI_1% inflation.

There is a compulsory buyback scheme whereby the developer can buy it back/sell it to a nominated buyer, usually an institutional investor/pension fund, at a minimum of the original purchase price + 30% extra within the first 3 years. They’ve done the buy back on all their properties so far by the sounds of it.

Overall it sounds like a good deal and we love the aspect of putting our money towards something that’s helping people.

However, we’re very weary of leasehold properties.

Is 107 years enough time left on the lease, given the above information?

Ground rent and service charges are paid by the Housing Association.

The 25-year contract with the HA is expected to be renewed afterwards, but it’s not compulsory, and if it didn’t get renewed then we’d be free to sell or rent to the open market.

Any advice would be very much appreciated please.

We’ve paid our £5k reservation fee but it’s only refundable until 5pm tomorrow, although verbally they did say we could take our time as there have been unprofessional delays in sending the paperwork/legal docs over.

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Are you sure this is the best time to go into investment property market?
Personally I doubt it.
Bank of England base rate will go to 6% by the end of this year, put your savings into a saving account will get you a decent return. Investing in property right now might give you 1% or 2% better returns? But it will be a lot of work I think to get that tiny extra bit return.
Who knows what changes will there be next year when there is a general election.
It’s just a lot of unknowns and I wouldn’t think it’s worth it.

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Completely understand what you mean.

But savings rates are still quite poor at the moment. Mortgage rates are shocking so a standard buy-to-let isn’t worth it at the moment.

Plus I forgot to mention but the above deal is completely hands-off, i.e. the Housing Association deals with tenants maintenance/repairs etc. No void period in rental income. No ongoing costs.

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What if you want to or have to sell within a few years? You’re instantly in negative equity?

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Promises . Promises. Buy a freehold They can put in scumbags and leave you high and dry . sounds like a rent to rent and you are being drawn in If it sounds too good to be true …

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Have to assume that never happened.

To even consider this the contract needs scrutinising by someone qualified to do so, have you done this?

I know a block where “vulnerable adults” are placed. It has ruined the lives of those in the block. No end of issues, it’s been absolutely hell for the residents. It’s not an area I would want anything to do with.

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@Mark10

Of course. Can’t take anything verbal.

Well we have the solicitor, but she’s the one who got the property deal from the developer. We originally spoke with an agency, they didn’t have anything in our budget, then passed us on to their solicitor who’s working closely with them. She spoke with the developer and he found one unit left in this particular block in Bradford. Bit of a topsy turvy way of doing things as normally the sourcer/agency shows you what’s available, you choose what you want, then go to the solicitor.

The block you know of - is it a mix of open market/private tenants plus social housing/vulnerable adults? Also curious to know what kind of issues they’ve experienced so we know what to consider.

RE negative equity, the value comes from the long lease in place so one company we spoke to advised that if you’re going to sell it, do so in the first 10 years. First 5 years is better. Then the value is equal to what you paid originally, if not a little higher as the rents would’ve gone up with inflation.

@Colin3 yes I suppose it’s a bit like rent-to-rent but with the government, hadn’t thought of it like that. I feel like a lettings agency can put bad tenants in whichever property you buy with whatever strategy. Any recommendations for strategies that are a bit more failsafe/lower risk on that front?

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I would say that it’s paramount you have an independent solicitor take a look at it, not one with close ties to the developers, they cannot act impartially.

It’s was a private block with a mix of private owners, private and social tenants, where one landlord passed his single property onto an association dealing with housing the vulnerable.

Had several pass through over a few years. Some issues;
Round the clock noise and music.
No respect for parking.
No respect for anyone!
Bin use or lack thereof.
Stockpiling rubbish next to council bins in street.
Drug use.
Crime.
Overcrowding.
General anti social behaviour.
They lived upto the stereotype - all of them.

The way I see it is if you don’t work for it you don’t appreciate it.

Now if the whole block was dedicated to housing “the vulnerable” at least they can keep it among themselves. It wasn’t and it effected everyone else negatively, to the point where the majority had to get together with the authorities to get them out.

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you are probably much younger than me. one thing I have learnt is never trust the Local authority or goverments. How many times have they got back on promises or just lied… I am too busy to relate the tales of landlords who have let property to H/A. Do not do it is my view

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Mark 10 you have got it

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I think that may be the worst deal Ive ever heard of. What made you think it was attractive?!

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Double the price of similar ??? Very attractive . They have seen them coming . !07 year lease That value will diminish .very soon

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Why would they buy it back plus 30% within a few years? Market is going down not up.

The 107 lease wouldn’t worry me, cheap to extend when they are high, well on a property worth £60k it is.

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Thank you all for your responses @Mark10 @David122 Colin , although the sarky tone in some of them is not necessary.

It’s definitely insightful to hear about your encounters with accommodation like this.

As to why it seemed like an ‘attractive’ deal…

  • It’s £13k per annum income for us, totally hands off, no expenses to take off, no void periods, nada. After 10-15 years it’s paid off, even after tax on the income. Everything after that is pure profit, plus whatever it sells for if/when we sold it. So although there’s potentially no capital growth, the cashflow is great. It’s hard to get both.
  • Mortgage rates are insane at the moment. We considered buying 2-3 cheap properties around the £60k mark with a standard 25% deposit and 75% mortgage, but adding the mortgage repayments, high interest, lettings fees, maintenance, damage/repairs, void periods, insurance, etc etc, it’s just not sustainable as an investment. We wouldn’t get anything each month. It’d be 25 years before the mortgage is paid off, plus we wouldn’t have made much in-pocket cashflow in that time.
  • We’re aware of other strategies. But HMOs for example are more expensive properties to buy. We have the deposit money, but wouldn’t be able to get a mortgage big enough. Serviced accommodation sounds good, but again, often more expensive properties, plus they sound like there’s more work involved and we’re time-short people unfortunately.
  • We’re open to getting funding from things like joint ventures on a guaranteed interest model, but we’d rather do our first one with our own money, because we’d hate for it to go wrong and involve other people’s cash. Also, with a cash purchase, we could borrow against the value of it to help fund a second property.

As for the buy back option. I should clarify that it’s not the developer themselves, usually an institutional fund.

Institutional funds have long invested in social housing anyway, and they’re happy with 4-5% returns. So they’re happy to pay 30% extra on top of what we/the buyer originally paid, because they still get their 4-5% yield for their investors.

Bonkers figures compared to open market values and rents, I know.

But, when you bear in mind the above information, it does start to make some sense.

We’re still weary over the leasehold nature and trusting government funding - even if there’s a 25-year contract and ring fencing in place - so I’m not defending this, just providing some more context as it’s quite a new strategy for private investors.

Now if anyone has any further advice on other property strategies that we might not have considered, we are all ears.

We’re very sceptical people, so trust us, we’ve been grilling every company we’ve spoken to! But we’re definitely open to other strategies if you all still think there are better alternatives for people in our position.

Cheers and have a blessed evening.

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@Colin3 please see above response (apologies it wouldn’t let me tag 3 people)

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you have already decided you will do it . Hence the deposit. Pointless in us replying

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The usual advice is avoid rent to rent deals at all cost. I believe that most landlords would also tell you to avoid letting to the Council/housing association. When you combine those two with a property for which you have to pay a premium, I think there is nothing to recommend this deal. I would strongly recommend you do a lot more reading about investing on forums such as propertytribes and landlordzone before you make a very costly mistake.

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Thank you @Colin3 and @David122

We are very tempted but the reservation fee is refundable. We’re thinking of every situation/outcome and have an appointment with the developer tomorrow evening, so we will use these questions and concerns in the discussion. Unless we’re absolutely sure, we won’t go ahead and will get the reservation fee refunded.

Browsing the forums is a very good shout so we will do that this evening and tomorrow thank you. Like you said we need more first-hand experience of people on the same or similar strategy.

Hopefully it’ll also be useful for brainstorming some alternative investment strategies suitable for us, as it sounds like we need to go back to the drawing board.

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Good luck if you go with this. How about Air B&B Option - I am very happy with Air B&B, higher rent, short term renters so less time to cause serious damage, there are decent people out there willing to manage it for you.

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@street42 What did you decide?

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