Property with short lease

Landlord Discussion
1

Hi folks. I’m looking to purchase a BTL property and am looking at flats with a short lease (less than 70 years). I’m a cash buyer so no mortgage needed. The properties with short leases seem way cheaper than longer leases.

The ROI over the remaining 70ish years of rental income looks to be better than purchasing an alternative flat with a long lease (and may necessitate a mortgage), or purchasing a lease extension. Am I missing something? Is there any downside to purchase a short lease flat for BTL if I don’t intend to sell it but to just run down the lease??

2

I think your not doing a total ROI calculation. Over the 17 years that Ive been letting property, more than 50% of my investment return has been capital gain. Typically any landlord buying carefully would expect similar returns. Short lease properties will decrease in value until you extend the lease and this becomes more expensive each year you dont do it.

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3

Also depends on property type, the reason some flats are on short lease is the propertty (eg a concrete and steel high rise) is not expected to live for longer than lease and will be demolished at some point raising all kinds of questions about who pays, etc

4

Personally, with cash in the bank, I’d consider borrowing some more, and invest in a Freehold house.

I believe capital appreciation of houses has beat flats in the past, plus with a freehold house, you are not tied into leaseholder agreements, and can do what you want to it, when you want.

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5

Properties with a short lease are likely to be cheaper due to the additional risks they come with:-

  1. Unless you extend the lease, if or when you come to sell it, you will likely need a cash buyer. The property is unlikely to be mortgageable.
  2. If you outlive the current lease you will either have to extend it, buy the freehold or hand the property back
  3. As the end of the lease gets closer, the value of your investment may well decline rather than increase
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6

Nobody has yet mentioned capital gains tax on any appreciation.

No. They “are” cheaper, they don’t “seem” to be. And there’s a reason for that. Imagine how much cheaper they’ll be when you attempt to sell!

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7

CGT would certainly need to figure in any total ROI calculation.

8

Thanks for the replies. Running the ROI numbers again and factoring in appreciation/CGT/Mortgage interest… I agree the ROI is higher with long lease and a plan to sell the property.

Having said that, a primary goal I have is to maximise monthly income over long term capital ROI. Given this, would folks agree that running down a cheap short lease BTL property is a good way to do so? Are there better ways?

9

What sorts of purchase prices and rental incomes are you talking about?

10

As an example I have found, a flat with a 42 yr lease is 100k. Rent looks to fetch 800-1000 pcm in that area.

In the same block, other flats with non-short leases are 170-200k.

With the first property, I can pay cash and take all the monthly rent. With the second I would need to pay monthly mortgage interest. So if trying to achieve maximum monthly income, the first seems a better option.

11

How many years does you ROI spreadsheet say it would take to make your money back plus a profit equal to putting the £100k in a savings account?

12

And what amount are you factoring in for expenses in relation to maintenance, any fees involved, etc?

13

Hi,
Given that monthly service charges and other overheads will probably apply, it is going to take you many years to just get your nominal investment back. In the meantime, the lease itself will become nearly worthless unless extended (which would probably cost at least £50-60K at the current point). It’s just not economical.
What could possibly be economical looking at this particular property is to buy the short lease for cash, let the property, extend the lease as soon as you can, THEN mortgage it, thus pulling out most of the invested funds, and reinvest them.
Alternatively, you could “flip” the property once the lease has been extended, its value increased and it becomes mortgageable. Just make sure that the property actually will be mortgageable with an extended lease.
Best of luck!

14

This calculation varies hugely with interest rates though- a few years ago I was getting close to 9% ROI on rent, back when interest was under 1%. (property values have been fairly static in that area, by contrast)

This has changed, more recently.

15

Yes, but when modelling the alternatives, I’d make a range of assumptions from worst to best case to understand where this investment sits.

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