Leasehold as a holiday home?

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OK, so leasehold properties have a pretty bad name at the moment, and its fair to say that people are weary of them (as they should be). I have always been fairly dismissive of any property where I am going to miss out on the capital gain, and effectively give it to someone else, but lets have a look at the facts.

Just a quick recap for those not familiar with the leasehold concept. Let’s say that you own a $500k apartment in downtown Auckland, and it’s freehold. You own the bricks / concrete and whatever else the apartment is built out of, whatever is contained within AND the piece of ground beneath the apartment (albeit a smallish piece given that its divided by all owners). If we imagined that the actual apartment was worth $200k and the ground beneath it $300k, then you can see how your $500k is made up.

In the leasehold concept, you do not own the ground beneath and instead you are purchasing just the actual apartment. This means of course that someone else owns the ground, and you will be responsible for a “ground rent”. However, your purchase price should only be for the actual apartment, so in our example above you would have only paid $200k. This means a significant reduction in the amount of capital that you must put to purchase the property, however it is generally the ground beneath which increases over time, so you are likely to miss out on much capital gain. In fact, many people who have overpaid for leasehold properties in the past have seen values decrease while the market in general increases.

So, back to the original question, could one of these make a good holiday home? It always comes down to the numbers, and what type of return you are after. On a cashflow perspective, these can make excellent returns, with generally a high yield. Lets look at an actual downtown Auckland 2 bedroom 65sqm example:

Purchase Price = $200k
Ground Rent = $8k (per annum)
Body Corporate Costs = $3k (per annum)
Rates = $1k (per annum)


 

If we were to rent out this property at an average of $180 per night for 60% of the year we would have a gross revenue of almost $40k. Subtract out the costs and we get to around $28k per annum (a gross 14% return). If we used finance the picture would look like this (based on 65% borrowing)

Purchase Price = $200k
Deposit Paid = $70k
Ground Rent / Body Corp / Rates = $12k
Finance Cost (@ 6%) = $7.8k


 

Based on our previous gross revenue of $40k, we now return about $20k per annum, so a pretty spectacular 28% return.
That said, we are missing out on a potential capital gain each year, so we do need to be compensated with a better cash return! If this had of been a freehold property, the numbers might have looked more like this:

Purchase Price = $500k
Deposit Paid = $100k (80% lending)
Body Corp / Rates = $4k
Finance Cost (@6%) = $24k

Cash Return = $12k (12% return)
Capital Gain = $15k (based on 3% over time) = (15% return)


So the results are fairly similar in terms of returns, once you factor in capital gains. Of course capital gains are never guaranteed, sometimes they are higher and sometimes they are lower.

Is finance possible?

Yes, most of the banks will lend up to 60-70% on a leasehold property.

Things to look out for

If you are considering this path, it is advisable to seek professional advice and spend some time reviewing the terms of the lease. In the past, people have purchased these type of properties without doing due diligence, which could leave you unstuck. For example, you would want to check how long the lease is for, when do the ground rents renew, how are the ground rents calculated.

Please note – we are providing general information only, this should not be constituted as investment advice.

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