Leasehold vs freehold – the different forms of property ownership | City Sales Real Estate

Leasehold vs Freehold – the different forms of property ownership explained

When it comes to buying property, there are two main types: freehold and leasehold. But what's the difference between them? And which is right for you? We’re going to help you figure that out!
 

What does freehold property or freehold land mean?

Freehold property is owned outright – you are the sole property and land owner. That means when purchasing the property, you own all of the house AND the land.

In the case of buying a freehold apartment(unit titles), you buy the apartment and a share of the land, as well as joining the body corporate which maintains any common areas.

What does leasehold mean?

When you buy leasehold, you're buying just your apartment(unit titles) or house. You don't own the land.

Through buying the apartment or house, you are also buying into the right to the leasehold lease and the right to occupy the land.

The land itself is owned by a landlord, and you will pay them annual ground rent for the land lease.

The ground rent is periodically reviewed. This is usually every seven years but can differ so make sure you check the ground rent renewal terms for any particular leasehold property you might consider purchasing.

TYPES OF LEASEHOLD LEASES

There are two major types of leasehold: Perpetual and terminating.

Perpetual Leasehold property

A perpetual leasehold means that the building owners can renew the lease as many times as they want. The building/property could be there forever and should retain some level of value throughout its lifetime.

Terminating Leasehold property

Terminating Lease means at a certain stage the leasehold will end.

When the lease expires, you no longer have rights to your apartment.

Whether you can remove the apartment or house will depend on the terms of the lease. For an apartment block its likely not possible to remove the property even if permitted by the lease. This means at the end of a terminating lease you would have no property to live in or on-sell. For this reason terminating leases are less desirable than perpetual leases.

Why buy leasehold?

Leasehold property ownership can have some benefits, including the initial purchase price being very cheap and the location of the property being highly sought after.

Where are leasehold properties?

In Auckland leasehold property tends to be located in prime waterfront CBD location. The buildings tend to be well regarded by occupants and perform particularly well as short term rentals.

What else is involved?

If you are buying a leasehold unit title, you will also be buying into a body corporate. So in addition to your Ground Rent, you will have an annual body corporate fee which covers expenses for common areas such as foyer, any building facilities like pool, gym and any other communal areas.

When it comes to making such an important purchase, it's important to think about what's right for you. Here are a few things to consider when deciding whether freehold or leasehold property is right for you:

- How long do you plan on living in the property?

- What are your long-term plans for the property?

- How much can you afford to spend on annual land lease costs?

- Are there any restrictions on what you can do with the property?

Is Leasehold a good buy for an investor?

Typically you will get a better cashflow from a leasehold property than you will from a freehold property. However the capital gains are unlikely to perform as well as a freehold property will.

Investors should be aware that there are more things to consider with leasehold properties over freehold. To avoid nasty surprises, it's important to research and calculate all finances includ any body corporate and other annual charges before making a decision to buy, as well as taking into consideration what kind of rent you can get for your property. This will give you more information about whether or not buying a leasehold apartment could work out for your needs.

For investors we would suggest looking into perpetual leasehold properties with a set formula for Ground Rent increases. Get in touch with your city sales rep to be pointed in the right direction.

There are pros and cons to both freehold title and leasehold ownership for property owners – so it's important to understand the difference before making a purchase.

It can be hard to know what type of property ownership is right for you, and the differences between freehold and leasehold properties may seem overwhelming. But by taking all of these factors into account, you can better decide which type of property ownership is right for you.

If you're trying to figure out if a leasehold or freehold property would work best for your needs, don't hesitate to contact us at sales@citysales.co.nz

You might be interested in our other blog post on what to look for when buying investment property
https://citysales.co.nz/index.php/blog/buying/what-look-investment-property