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Registered Property Valuers
Wellington, Hutt Valley & Porirua City

Leasehold Land

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
  • You don't own the land. You rent the land from the owner.
  • The rent is normally paid in installments, say three or four per annum.
  • The property's asking price can be much lower than you expect. It can look like a bargain!
  • The rent is based on a percentage of the freehold land value (see below for more explanation)
  • You still have to pay rates, insurance and maintenance, as well as the leasehold rent
  • The leasehold rent is normally fixed for a lengthy period of time, 7-21 years
  • But when reviewed, the leasehold rent can increase by a very large amount
  • You and your lawyer must read the lease carefully and understand it

What normally catches your eye is the property's asking price. The price is often remarkably lower than what you would expect to pay in the area. It can look like an absolute bargain.

A 3 bedroom house that might normally fetch $1,000,000, on the market asking only $750,000. Wow!

The easiest way to get your head around this is to remember - you don't own the land. Someone else does and you pay them rent for the privilege of having a house there.

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. .

How is the rent/lease fee determined?

The lease fee is normally calculated as a percentage of the lands freehold value. Say what?

Ok, so s
ay the land has a freehold value of $500,000.  That's the amount you might have to pay for the land if it was theoretically vacant. You'll see this number on the property's rating valuation as the "Land Value"

Now a typical lease fee is around 5% of the freehold value.

Thus $500,000 X 5% = $25,000 per annum. So you have to pay the landowner $25,000 a year. 

Don’t forget that you are still responsible for other expenses too, like council rates, property insurance, maintenance etc. 

What's the benefit? Why on earth would I do this?

A benefit to the buyer is that the lease fee is normally fixed for a substantial period of time – say 7 or more years.

So, taking the example above, the annual lease fee remains at $25,000 for 7 years. This gives you some surety, almost like having a fixed mortgage for 7 years.

Also, because you are paying less for the property - say $750,000 rather than $1,000,000, the mortgage you take out is less, as are the mortgage repayments.

Thus the land rent you pay, plus your mortgage payments are less than what you would be charged for a typical mortgage, if the property was full price. 

Here's the maths...I know this can seem tricky

Scenario 1: House on freehold land - you own the lot
Market value = $1,000,000
Freehold value of the land = $500,000
Mortgage interest rate = say 6%
Repayments per annum = say $60,000 per annum (simplified, and if borrowing the lot!)

Scenario 2: Same house on leasehold land - you don't own the land
Market Value =$750,000
Leasehold rent = $25,000 (say 5% of $500,000 - the freehold land value)
Mortgage interest Rate = say 6%
Mortgage repayments per annum = $30,000
Thus, leasehold rent plus mortgage repayments = $55,000

So, in this example you save $5,000 per annum. 

It doesn't seem like a lot in this example, but if you adjust the numbers (pay less for the property, or your lease fee is less per annum), it can make a significant difference.

What's the catch?

Firstly, you never own the land. You are always paying rent/lease fee to the land owner.

After 7 years the land value could rise 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 2008. The freehold land value at that time may have been as little as $100,000.

So the lease fee for the last 7 years at 5% would have been $100,000 X 5% = $5,000 per annum.

Now, in 2018 the freehold land value jumps to $500,000 - simply because the value of the land has increased so much.

The lease fee is now $500,000 X 5% = $25,000 per annum. Ouch! 

Two bits of advice here. Talk to a property valuer experienced in dealing with leasehold properties. Also, get a lawyer to go through the leasehold documents, so they can advise you on your rights and responsibilities.



Next Article: Rating Values; Can they be Trusted?
Copyright 2021. TimStokesValuer.co.nz
  • Home
  • Articles
    • How to choose a building inspector
    • How to choose a real estate agent
    • How to choose a mortgage broker
    • How to choose a property valuer
    • How to choose a property lawyer
    • Tips for First Home Buyers
    • How to invest in property
    • How to work out a property's market value
    • Why get a property valuation?
    • Building a new home - what are the value issues?
    • What are Company Share apartments
    • Leasehold Land - what is that?
    • Rating values - can they be trusted?
    • Houses that won't sell
    • Buying property - the 5 golden rules
  • About Us
  • Fast, Free Quote
  • Client Comments
  • Contact