In English property law, property may be held either freehold or leasehold.
Freehold property means that the land on which the property stands is owned as well as the building itself. This usually only applies where the whole building and the land is in one title and owned by the freeholder. A Freeholder is entitled to a nominal rent from a leaseholder on a long lease or a market rent on a shorter lease, usually 1-25 years depending on the type of property.
Leasehold property is property that is held on a lease for a term of years. In some cases this is for a short term of, say 5 or 10 years up to a maximum of 999 years (known as a virtual freehold). Most flats/apartments are owned leasehold usually on leases of 99 to 125 years. There are provisions to extend the length of a lease, codified in English law, whereby using an established formula, an extension to a lease can be purchased. This is usually necessary where a lease for a property falls below 70 years as the value would be affected.
Commercial or Residential
In respect of the purchase of property for investment either a freehold or a long leasehold title is suitable. In Central London it is almost impossible to purchase properties for less than £150,000 which would buy a small studio flat, one room used as both a bedroom and living area with a bathroom and kitchen attached. Generally, prices decrease as one moves away from the centre.
When looking to buy property, it has almost become cliched that there are three criteria that are important – location, location and location. In order to rent residential property out it must be close to transport links and set up such that a person can move in with furniture etc already in place.
In renting a property out, which cannot be guaranteed, one is likely to see a return on ones investment of between 8 and 12 percent in revenue terms. A standard charge of an estate agent for finding a tenant is 10% of the annual rent. Residential tenants usually occupy on the basis of a shorthold assured tenancy which is a contract for one year and guarantees that they can be removed from the property at the end of the term. It may be that such tenants wish to take a new contract at the end of the year but to ensure continued protection it is best to use a 6 or 12 month shorthold assured tenancy for renting out residential property.
If one is looking to invest in commercial property, one will often purchase an investment whereby a property is purchased with a tenant in place on a long lease. There may be rent reviews by which, according to the terms of the lease, at particular intervals, usually 3, 4 or 5 years, the landlord may increase the rent. The value of such rented property depends on the type of tenant. A good blue chip company, ie. a well quoted company with a top credit rating, will command a greater price than a property rented by a less substantial firm. One would expect to purchase the property at a multiple of the rent achieved, ie. a property earning £100,000 is likely to cost between £800,000 and £1.2m to purchase. Such properties can be purchased at auction and the key thing for such purchases is that one sets a limit in advance of what one is prepared to pay and does not exceed that limit.
In addition to the rental income, if the property market continues to improve as it has, and a good location is chosen, one would also expect to see an increase in the capital value of the property that would be realised on sale.
The costs will be very much subject to agreement with the individual concerned although certain costs are standard and required by law in order to register a valid title. Approximately £500 will be spent on searches, legal fees will be between 0,5 and 1 percent of the value of the property depending on the services offered. Stamp duty must be paid at a maximum of 5% to the Inland Revenue as a tax on the purchase of the property and in addition a Land Registry fee of between £200 and £1,000 is payable depending on the value of the property. In relation to costs, one is therefore looking at needing to have 15 and 20 percent of the value of the property in addition to the purchase price to cover registration fees and other matters.
The minimum investment would be £100,000 although this very much limits what can be purchased and it would be more sensible to look at a realistic minimum limit of £200,000 as this would give a greater choice for what is available in areas not too far from the centre.
If you are interested in considering the purchase of a property to rent in the United Kingdom please contact us with the amount you are able to invest and any further information you might be able to give as to your requirements.