In most countries, when you buy a home, you also own the land. However, this is not the case in the UK. Here, properties are sold as a freehold or leasehold. But, what is the difference, and is it better to buy a freehold or leasehold property?
What is a freehold?
A freehold means the landlord owns the property and the land indefinitely. This is, of course, on the assumption the landlord does not default on the mortgage repayments. A freeholder can retain his or her land, but ‘rent’ out the property to a leaseholder.
What is a leasehold?
A leasehold is when a person buys a lease from a freeholder, to temporarily own their property. The duration of how long the leaseholder owns this property varies from decades to centuries, but is commonly for 99 years. The leaseholder forfeits their ownership rights if the lease is not extended before it expires.
Freehold or leasehold: Which is better to buy?
Owning both the property and the land, meaning the freehold, is the best situation. Land always increases in more value than bricks and mortar.
However, not everyone can afford to buy a freehold, especially when property prices are rising faster than salaries across the country. So, if you are a new homebuyer or property investor, do not fret.
There is a lot of bad press surrounding leaseholds. Leaseholders can encounter unreasonably high ground rent and excessive service fees. It is unfortunate, but, such problems caused by dodgy freeholders can be hard to avoid.
Instead of dwelling on the negatives, focus on the big picture when growing your property portfolio.
An option for buyers on a budget is to buy and hold onto a leasehold property until the equity grows. Then re-mortgage this property to buy a freehold. Your ultimate goal should be to own a number of freehold properties. Owning a freehold gives you more control to expand the building and / or to redevelop the land.
Best option for buying a freehold on a small budget
If, however, you adamantly want to buy a freehold property, but your finances are limited, start small. My advice is to buy a freehold studio or one bedroom apartment that can, with the construction of a partition wall, convert into two bedrooms. More rooms will increase your rental income potential.
This is how I started growing my portfolio, many years ago, on a very small budget.
So, freehold or leasehold: Which is better?
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