Leasehold Land - what is that?
Buying a property on leasehold land can be a tricky affair. So what’s it all about?
The Main Points - for those in a hurry
The sale price is often remarkably lower than what you would expect. It can look like an absolute bargain. A 3 bedroom house that might normally fetch $400,000, on the market asking only $260,000. Wow!
If you purchase a leasehold property, you enter into a contractual agreement with the land owner (the lessor) to lease the land from them. This means you must pay an annual lease fee. The lease fee is normally calculated as a percentage of the lands freehold value.
How is the rent/lease fee determined?
Say the land has a freehold value of $200,000. A typical lease fee might be 5% of the freehold value. Thus $200,000 X 5% = $10,000 per annum.
Don’t forget that you are still responsible for other expenses like council rates, property insurance, maintenance etc. So the $10,000 is on top of those usual annual costs.
What's the benefit?
A benefit to the buyer is that the lease fee is normally fixed for a substantial period of time – say 14 years. So, taking the example above, the annual lease fee remains at $10,000 for 14 years. This gives you some surety, almost like having a fixed mortgage for 14 years.
What's the catch?
Firstly, you never own the land. You are always paying rent/lease fee to the land owner.
After 14 years the land value could have risen dramatically. The lease fee (say 5% again) is calculated on the new land value, and thus the annual lease fee can rise massively.
This has happened to many leasehold property owners. They may have had their last lease review in say 1998. The freehold land value at that time may have been as little as $50,000. So the lease fee, for the last 14 years at 5% would have been $50,000 X 5% = $2500 per annum.
Now, in 2012 the freehold land value jumps to $200,000 - simply because the value of the land has increased so much. The lease fee is now $200,000 X 5% = $10,000 per annum!
The Main Points - for those in a hurry
- You don't own the land. You lease the land from the owner.
- The rent is normally an annual amount, paid in instalments
- The property's asking price can be much lower than you expect
- The rent is based on a percentage of the freehold land value
- You still have to pay rates, insurance and maintenance
- The rent is normally fixed for a lengthy period of time, 7-21 years
- When reviewed the rent can increase by a large amount
- You and your lawyer must read the lease carefully and understand it
- In leasehold you own the buildings and any other improvements on the site, but you lease or rent the land from another owner.
The sale price is often remarkably lower than what you would expect. It can look like an absolute bargain. A 3 bedroom house that might normally fetch $400,000, on the market asking only $260,000. Wow!
If you purchase a leasehold property, you enter into a contractual agreement with the land owner (the lessor) to lease the land from them. This means you must pay an annual lease fee. The lease fee is normally calculated as a percentage of the lands freehold value.
How is the rent/lease fee determined?
Say the land has a freehold value of $200,000. A typical lease fee might be 5% of the freehold value. Thus $200,000 X 5% = $10,000 per annum.
Don’t forget that you are still responsible for other expenses like council rates, property insurance, maintenance etc. So the $10,000 is on top of those usual annual costs.
What's the benefit?
A benefit to the buyer is that the lease fee is normally fixed for a substantial period of time – say 14 years. So, taking the example above, the annual lease fee remains at $10,000 for 14 years. This gives you some surety, almost like having a fixed mortgage for 14 years.
What's the catch?
Firstly, you never own the land. You are always paying rent/lease fee to the land owner.
After 14 years the land value could have risen dramatically. The lease fee (say 5% again) is calculated on the new land value, and thus the annual lease fee can rise massively.
This has happened to many leasehold property owners. They may have had their last lease review in say 1998. The freehold land value at that time may have been as little as $50,000. So the lease fee, for the last 14 years at 5% would have been $50,000 X 5% = $2500 per annum.
Now, in 2012 the freehold land value jumps to $200,000 - simply because the value of the land has increased so much. The lease fee is now $200,000 X 5% = $10,000 per annum!
