A number of clients have asked whether they should purchase the freehold on a property for which they have the leasehold tenancy.
My answer is a definite NO!
Developers in many cases don't want to take responsibility for the ongoing management of the property once complete – they simply want to move onto the next development as quick as possible. So what happens is that once the last apartment is sold, they'll sell the freehold onto a professional freehold management company.
This is when you may be asked if you'd like to buy the freehold. (As the leaseholder you should be offered the first right of refusal assuming it hasn't been sold before you exchanged/completed on the property).
The reason I say to stay away from it comes down to three main reasons: committees, capital growth and economies of scale.
Being ruled by a committee
The problem comes when you consider that there may be 20 other flats in the development and you're going have to share the freehold (or at least the committee that owns the freehold) with 19 other leaseholders. This of course means that you manage the overall property “by committee”. That committee may not have the same commitment to maintaining the property as you. And who knows — you may not even get along. Any number of things can go wrong plummeting your peaceful property investor lifestyle into chaos.
Lack of capital growth due to fixed income stream
The freehold doesn't increase in value because its income stream is fixed (according to the terms of the lease) for the period of the lease so theoretically, a £900 per year income stream over 125 years has no scope for growth. This isn't entirely correct but the thing to recognise is that investing in freehold where a leasehold is present is a totally different investment than direct property investment.
Unless you have hundreds, it's not worth the ground rent
The game of freehold is best left to the companies that specialise in freeholds. They have hundreds, thousands even, of freeholds that they manage and therefore the £900 income each year becomes part of a bigger more worthwhile pot. It's called economies of scale.
You're not like these guys, so my advice is stay away from it and accept that the developer is only advising you as a matter of legal requirement. It's not a serious offer.
You are an investor – not a professional freeholder
More importantly you are a Set and Forget property investor and you should recognize that this isn't a Set and Forget investment. Leave it to the companies that specialise in owning and managing freeholds.
In fact, one of the things I love about leasehold is that someone else does all the work and takes all the responsibility for my properties, leaving me to get on with life. All I have to do is pay two charges each year — the ground rent and the service charge. Most of the time I set up a monthly direct debit and simply forget about it.
So when you get the freehold offer in the mail, just ignore it and get on with the important things in life.
If you still aren't convinced then call the team on +44 (0)207 923 6100 and they can go in to much more detail for you. There is a whole body of legislation that will put you to sleep every night for the rest of the decade. 😉
Live with passion,