After the leasehold scandal that shook the nation and started debates in the real estate market, there has been an increase in the interest to look in closely to how leaseholds work. A lot have been looking into the pros and cons of this lease to help determine the best way for them to be more secured in investing in real estate. Here are some of the advantages and disadvantages of leasehold:Advantages:
1. Leaseholds are cheaper than property purchase. Buying properties can be a major undertaking and can take up much more time. For most people, leaseholds provide an alternative to buying or renting outright. The cumulative rent may rake up to a higher price in the long run and the cost of buying may just be too much of a risk.
2. Lower interest rates. For renting properties, interest rates are negotiated annually or per shorter time frames. Rent rates can dramatically increase over time. With leaseholds, the rates, especially of negotiated well, remain fixed for a longer period of time.
3. More revenue returns. Leaseholds can be transferred or sold for the tenant to accumulate passive income from rent as well. This is very much like sub-letting apartments. The owner (freeholder) does not have a say in this unlike landlords.Disadvantages:
1. Increase in land value can mean increase in rent. When negotiating, freeholders secure their side of the agreement by having clauses for the right to increase rent rates especially if the land value increases. This does not bode well for the lessee and this is one contributing factor to the leasehold scandal .
2. Owners may demand higher down payments. The freeholder can require a higher down payment to secure the lessee’s continued commitment to the lease. Since the time frame can go on for decades, the larger down payment, the more secure a freeholder is that the lessee will hold his end of the contract.
3. Rent rates fluctuate. Some freeholders retain the right to change the rent rates even with the fixed interests per annum. This is something that you should always check when negotiating your lease.
Like two sides of a coin, there will always be benefits and losses in terms of leaseholds. The decision of entering such contract then depends on how the pros and cons work for you.