Opinions please

[Grampa]

Toying with the idea of buying another flat (cash buyer)

Looking at three properties with different pros and cons and I wondered what you guys would think on the options.

All three are in a fairly nice central town location (walking distance) with parking and or garage. The yields are not brilliant but above average for the area but service charges have been equated in the yield figures but no legal fees or all the other extras that RL has kindly provided in the past. .

As a rough starting point I have made the assumption I will get 10% off the asking price and that is the price quoted below.

Flat 1 (1 bed, 2nd floor) £67500 yield 7.1% (but needs a lease extension and new small kitchen = approx. 5k more) Adjusted yield = 6.64%

Flat 2 (1 bed, 1st floor) £81000 yield 6.66% (needs lease extension but share of f/hold included = approx. £500 more)no garage. Adjusted yield = 6.6%

Flat 3 (2 bed 2nd floor converted semi) yield 6.5% (900 year lease)

But then after mulling the above over a glass or 2 of red wine I saw a 3 bed 2nd floor flat (90k) on sea front above a shop that could bring in 9.5% from a family unit or 14.5% as a HMO with sharers. mmmmmmmmmmm. Heavy W&T springs to mind.

Downside it may be hard to sell on as it is difficult I'm told to get a mortgage on being above a shop..

[Mortitia]

I might go for the one above the shop and sea views always a bonus. I have found this a very successful format myself - who owns the freehold and the shop downstairs (what is the shop trading as) - any chance of a later purchase?

I never buy leaseholds - unless with a share of the freehold so don't feel I can really comment on your other choices Grampa.

I would visit the intenteded premises at all hours of day and night to see what goes on and who lives there - you don't want to buy next to the neighbours from hell!

[Richlist]

Well the information is light on detail but.....all in my opinion:-

I would never buy a property above a shop. Although the yields look attractive in your case, they don't compensate for the difficulty you will have in selling it on. One of the basic rules of investment is to have a viable exit strategy. Properties which are difficult to mortgage may take forever to dispose of.

Wether any of them have garages or parking places doesn't really make any difference to their ability to let in my experience.....as long as they have one or the other.

Two of the properties require lease extensions. I tend to steer clear of these as they can be problematic and expensive. Presumably your figures DO NOT include the cost of any extension or the legal fees associated with it. I was under the impression that new buyers could not extend for a fixed period of time.....it used to be 2 or 3 years but that may have changed. It was always quicker and more cost effective for the seller to extend the lease before selling.

On balance I'd go for flat No 3......although the lowest yield its only marginally lower, there's a 900 year lease so doesn't need a lease extension, doesn't need a new kitchen has a better exit strategy. BUT one has to speculate to accumulate and there may be other factors you haven't shared with us that would change my conclusion.

[Melboy]

I don't normally buy flats but I did buy one in unusual circumstances but with this ground floor flat with private garden there was a 999 year lease, no ground rent no additional extra's to pay out for so it is virtually freehold and yet another mistake I made in a whole career of mistakes I failed to buy the upstairs flat last October when it became available which would have given me control of both flats and the whole building

Flats above shops.......I would want the whole package....... shop and flat. Mortgages are difficult to obtain on flats above shops and to sell on.

Here, at my location, loads and loads of new build flats went up over the last 10 years or so but the biggest complaint so far is from the private purchaser buying a flat in a block of flats only to find the other flats purchased by BTL' ers and putting in some tenants who were DSS with the forcastable results. This has really led to a huge supply of these flats being sold off at the moment at below market value and way below what they were purchased for.

You would need to do your homework Grampa and probably with a stake-out as well to see exactly what was happening throughout the day and evening.

[Grampa]

Thanks for the input guys.

Richlist regarding the lease extensions though I am no expert I do deal with a little bit of block management and I do think buyers are missing a trick with leasehold properties with 75 years or less left on the lease term. Because it can scare a lot of buyers off and the property can hang around for sale a long time which put you in a good position to get a extra low offer accepted.

There is a 2 year rule about extending a lease after buying I believe.

But that still leaves other options

1 Do nothing

2 Wait 2 years until extending

3 Make it a provision of buying the current owner transfers his right to extend (section 42) to you and it is all done during the selling process. A extension via the s42 route entitles the leaseholder to 90 years added to the remaining years and a peppercorn rent. I did this on a flat purchase 12 months ago.

4 Make it a provision of buying that the lease is "extended by agreement" with the freeholder which normally will mean the lease is brought back up to 99 years. This is likely to be cheaper than the above option but I guess it depends on how long you plan to keep the property.

I don't think it effects the value of the property by much if you sold 10 years later and had either 89 years or 150ish years but the longer lease will appeal more to the shrewder buyers.

A share of the freehold normally means you only pay the legals for a extension which can 400-500 quid but without it you pay a few grand to the freeholder plus the legals.

[Grampa]

The more I learn about leases the bigger the can of worms you open and pros and cons.

If there is a managing agent involved the S/Charge will be higher but generally the block is/should be managed correctly and reserve funds in place and future planning for works etc.

If the freeholder or leaseholder with a share of F/H manages themselves the cost can be about half or less but there is a big but about it done correctly and on a ad hoc reactive type arrangement. This can but not always mean you get hit with a big bill when works required and there are no or little funds in the kitty.

As Melboy and Mortitia say there is a good argument for not buying leasehold.

[Mortitia]

This a situation I found myself in only last month:-

Viewed a maisonette in a 9 unit development with front door and garage under at ground level + another garage adjacent owned by elderly person but rented to vendor. I can see a possibility of buying extra garage and extending into roofspace.

Vendo,r a Canadian elderly couple have already completed on a log cabin somewhere (don't ask!) so are selling at a 20K loss on 2007 purchase price. Share of freehold is up for grabs and this is what attracts me. Lease on maisonette is only 63 years. My offer is accepted. I have large cash deposit and finance in place.

Suddenly freehold share is off the cards as vendor has failed to follow through on his part and new management company set up now wants to charge BTL's £2000 per year to let. I'm off and vendor can't sell.

[Grampa]

I think you are doing the right thing Mortitia. But you could look into the right to manage or right to buy the freehold if you can get 50% of the other L/Holders on board.

[Richlist]

I have lots of leasehold flats. There is always gonna be the odd surprise/ failure to complete/ horror story but then there is with everything else including freeholds.

A leasehold development that is managed by one of the larger Company's who maintain the property well, have good customer service, with reasonable service charges & ground rents, formal reserve funds, permission to let fees that are not exhorbitant, are easy to contact, react quickly to issues raised, maintain good communication etc etc etc works well and can be very profitable. I've had flats that fall into this category since 1999 with never any problems with freeholders, service charge companies/ managing agents or high charges. A few of the flats have been such good performers the total rental income since purchase has paid for the flat X3 times over. Don't let a very small sample / example of leaseholds that don't stack up financially put you off leasehold purchases generally.

There are many different types of leasehold property management ranging from the above to the leaseholders/ freeholders doing it themselves.....and lots of different ones in between. Leases come in all shapes and sizes with different stipulations, obligations and responsibilities.

With regard to buying short lease property:

1. They are really only suitable for cash buyers.

2. Mostly they come up at auction.

3. The cost of the lease extension can be higher than expected often well into 5 figures.

4. Often the legal fees and associated costs are easily forgotten.

5. By virtue of the short remaining lease the properties are older and older property generally are not always well maintained internally or externally.

6. The cheap selling cost should not be the primary reason for buying.......one still needs to consider all the other costs, factors and restrictions....many buyers/ bidders do not.

[Mortitia]

I think you are doing the right thing Mortitia. But you could look into the right to manage or right to buy the freehold if you can get 50% of the other L/Holders on board.

The freehold would not be available now as 4 of the leaseholders got together and bought it outright. My vendor did not go ahead in fact they waited for him to commit but he failed to do so and so his unit is now managed by the 4 others - they imposed this new charge - probably to put off BTLs. Vendor is stuffed until he renews his lease or a cash buyer comes along.

I also am secretary to a couple of management companies in which I have a share of the freehold. The savings are massive for DIY management and I have never in 30 years come across an agent who is fair with charges or insurance premiums.

[Richlist]

It depends on your definition of fair. Fair to the leaseholders does not necessarily equal fair to the agent. The agent is in business to make a profit and there is nothing wrong with that but there is a balance to be struck.

I pay between £56.50 - £90.00 per month per flat for service charges. For that I reckon I get good value for money.....buildings insurance, external maintenance & decoration, cleaning of common areas & redecoration, gardens & grass cut and all the other attributes I mentioned in my previous post.

As the charges are tax deductable the real cost to me is between £33.90 - £54.00 per month per flat and I don't have to lift a finger or spend my time & energy organising anything.

[Grampa]

I also am secretary to a couple of management companies in which I have a share of the freehold. The savings are massive for DIY management and I have never in 30 years come across an agent who is fair with charges or insurance premiums.

As mentioned it just depend what is classed as fair. A managing agent as a rough guide would set their fee by the amount of units in the block somewhere in the region of £100-£350. The more units generally the lower the figure. Also somewhere like London or penthouse flats would/could bump up the fees. Then there is the extras such as After hours service, contract supervision, attending court, attending AGM's, pre-contract enquires, consents for alterations, the list can go on and on but not all agents charge all these extras in the same way letting agents have various fees.

Regarding Insurance most agents are getting commission in the region of 20% I know because that is what I get. You don't need too many £1500 policies to have a nice extra income.

[Mortitia]

Regarding Insurance most agents are getting commission in the region of 20% I know because that is what I get. You don't need too many £1500 policies to have a nice extra income.

Quite. I have insured a block of 4 flats in SW14 with a rebuild value of £1.3M for just over £540 pa. For years we were paying upwards of £1500 via a well known management company with the initials BM. It tooks me minutes to arrange and premium has stayed the same for the last 5 years.

[Richlist]

I'm involved in the management of a couple of developments.

1. A total of 96 flats insured for £11.9 million with a premium of £9901 (£103 per flat)

2. A total of 6 properties insured for £654K premium £1214 (£202 per flat)

It does depend whats included ie contents of common parts, landlords contents, alternative accomodation / loss of rent, level of employers liability and most importantly the excess levels.

We can all get low premiums if we want to pay the first £1000 of a claim.

RIGHT.....I'm off to Spain to escape the rain and cooler weather soon, so I'll catch up on any new posts on my return. .....don't get wet.

[Grampa]

Early days yet but I have just had offers accepted on 2 of the properties and got 16% off the asking price on both which I'm pleased about. One is just L/H and the other a share of the F/H. Just re-done the potential yield calculation and it now 7.8%. Happy days

I may not want the L/H one but have a friend who I could pass it over to and maybe get a finders drink out of it.