The Government announced plans to crackdown on overpriced property management charges to create a fairer system for tenants and leaseholders.
The Department for Communities and Local Government (DCLG) will consider whether a new independent regulatory body is needed to look at implementing measures that will protect consumers from unfair costs and overpriced service charges and give leaseholders a say over their property management agent.
The call for a consultation comes after reports from Which? that owners and landlords are being ripped-off by as much as £700 million in unnecessary charges each year. In one example, a landlord was charged £500 by a property agent just to repair a shower door.
This could be good news for landlords with leasehold private rented properties (usually flats) that are subject to sometimes extortionate ground rent and service charges for the upkeep and maintenance of a communal block.
If the proposed measures are put in place, there will be more transparency over what is being charged and what those charges are for, making the costs associated with investing in a leasehold buy-to-let more forecastable.
In light of this news, we thought we’d look at some of the things landlords should consider when thinking of investing in a leasehold property to let.
Restrictions of the lease It may be the case that the lease prohibits you from sub-letting or renting the property altogether. In less extreme cases, you might not be allowed pets. This may not bother some landlords, but others who are animal lovers may be more than happy to rent to pet owners!
Length of lease You should be looking at properties with long leases – at least 99 years. Shorter leases can have a negative impact on the value of the property and also diminish saleability. Your mortgage company may also require a minimum lease length before lending to you. You can extend leases, but this costs money and you usually need to own the property for two years before being eligible.
Service and ground rent charges With a leasehold property, you don’t own the land so you will need to pay a ground rent to the freeholder. This is normally a fixed fee paid annually. In addition, you’ll be required to pay a service charge for repairs and maintenance to the communal building and gardens. This cost in particular can be as little as £10 a month but can also run into the thousands. It usually increases annually as well.
Sinking fund Some leases include a sinking fund, which holds back some money for unexpected repairs or big jobs such as replacing the roof. This will add to your running costs, but could avoid you having to pay out a chunky amount (which is equally divided between all leaseholders, even if you’ve only just purchased the property) for work. If there isn’t a sinking fund, it’s probably worth finding out if any major jobs are planned in the near future which you will have to contribute to.
The managing agent As the Government’s proposals highlight, some property management agents are exploiting leaseholders and unfairly overcharging while providing a poor service. It’s therefore definitely worth spending some time finding out who is responsible for the management of your building. Do some online research and ask other people in the building what they are like to deal with and how transparent their charges are.
The verdict? In most cases, it’s probably better for landlords to invest in freehold properties over which they have complete control. That said, it does also mean that they are 100% liable for all maintenance and repairs.
Leasehold properties are usually cheaper and as long as you know what you’re doing and are clear about the ongoing running costs, there’s no reason why a leasehold buy-to-let couldn’t be a profitable investment.
