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  1. #1

    Smile Intro and probably a stupid question!

    Firstly I would like to say a huge thank you to everyone here who is so generous with sharing their knowledge, I have learned an immense amount by reading page after page on this forum!

    My husband and I have been lurking and reading for weeks now and I thought it was about time we got active and introduced ourselves. My husband is 42, I'm 40 (as of yesterday!) and the time is right for us to start investing in property. The first house we bought 13 years ago was rental and we did very well from it, good tenants and made a good profit when we sold it after a couple of years, yes, we should have kept it but it did help us get a leg up and contributed to where we are today. We nearly own our house, value $530k, mortgage of only $18,000, we both work but we live off my husband's income with my part time wages going straight to the mortgage, we will be debt free in a few months. We have a small share portfolio which we would like to grow as well, once we are debt free we plan to continue to live off the one income and divert that extra $750-$1000 a week into property/shares.

    I do wish we had got into property investment years earlier but 5 years ago we had 4 year old twins and a newborn, it just wasn't the right time for us. Now is the right time though, our plan is to buy and hold, we are looking at a long term plan so we are very comfortable in 15 to 20 years time.

    At this stage we are keen to get started but kind of hung up on the 'what is the best thing to do' phase. We have been looking at properties around where we live, we are getting a feel for different areas etc but we feel kind of stuck - wanting to do the right thing, buy in the right area - opportunity for good capital growth, yet yields don't stack up so well. Knowing we have the ability to pour money in is reassuring but we don't know if this is the best use of our money??

    Now for the question... and I have done a lot of reading about it and I guess the answer should be obvious to me seeing as there seems to be an overwhelming negative response! Leasehold properties, is this something we really should avoid? Near to where we live there is a town that has a reasonable amount of leasehold property, prices are low for them, yields are fantastic as you would expect. Some of these properties have just renewed their leases, up for renewal in 2033. This town has a river, beach and is slowly developing into a nice area. What I want to get feedback on is say we bought one - $120,000. Rates $2000, lease $2000 pa. If that property pays itself off in say 10 years, if we sold it for even the purchase cost, we have $120,000 and it has cost us nothing or little, are we being naive here???

    It is only a scenario we have considered and we are more keen for freehold property to buy and hold, but thought if this was a viable option we could do a bit of both.

    Wisdom and opinions shared will be gratefully received!

  2. #2
    Join Date
    Jan 2004
    Location
    Whangarei
    Posts
    5,867

    Default

    Remember that the property value is affected by the leasehold costs. So if you pay it off and the lease goes up 500% (or more), would it still be worth the same?

  3. #3

    Default

    That is why it wouldn't be wise to invest in a house with not long to go on the lease, a lot are up for renewal in the next year or so and yes, they are going up from around $400pa to around $2000pa. One that has 19 years until renewal could be sold with 8 years or more still left on the lease, value wouldn't be the same as one that has 20 years to go but still not worthless.

  4. #4
    Join Date
    Apr 2004
    Location
    Auckland
    Posts
    1,910

    Default

    When doing the numbers - leasehold may look attractive.
    But the reality is that on-going maintenance is often under budgeted.
    Tenants are quite rough on properties - it's not theirs - they don't care.
    Eventual resale can also be more difficult.

    Freehold - you still have the maintenance problem - but at least the land will appreciated (provided you buy in correct location).
    The three most harmful addictions are heroin, carbohydrates and a monthly salary - Fred Wilson.

  5. #5
    Join Date
    May 2007
    Location
    Hamilton
    Posts
    3,613

    Default

    What is your expected rent?

    Quick P & L

    Rent say $250 pw *50 = $12500 - MY COMPLETE GUESS!

    Less
    Rates $2000
    Lease $2000
    Interest on $120,000 at say 6% = $7,200
    Insurance $800
    Repairs, lower level, so maybe $1500
    Other $1000
    Property Management? $1078
    TOTAL EXPENSES $15,578

    LOSS $3078

    So unless rent is over $311 per week, no point as still loss.

    Say you are even making $100 week profit, is $5,000 approx per year. Less tax, say $4,000 if you are on lower tax rates.
    Over 10 years you make $40,000 - but would the property reduce by this much or more?
    After 20 years, lease up, received $80,000 on a property that cost you $120,000 - What is the point??

    Ross
    More Profit from Property? TEACH ME MORE
    Ross Barnett - Coombe Smith Property Accountants
    Proud to give the best property advice for over 13 years.

  6. #6
    Join Date
    Jun 2013
    Posts
    2,116

    Default

    Quote Originally Posted by Learning to Fly View Post
    Leasehold properties, is this something we really should avoid?!
    Leasehold is all the worst aspects of property, without the good part. Avoid.

  7. #7
    Join Date
    Sep 2013
    Location
    Auckland
    Posts
    3,885

    Default

    It's the land that makes you capital gains/big profit, not the rent, and it's generally not advisable to buy leasehold properties. LH properties don't really go up in value.

    You should first of all identify what you are trying to achieve.

    Are you looking to have a lump sum amount of money at retirement (which may run out someday depends how long you and your hubby live)? Or do you want a steady passive income from properties?

    If you are looking for a sum of money, how much is enough? how many properties do you need to buy to achieve that? Same goes for passive income.

    Once you identified how many properties you need to buy to achieve the above, do you know how to finance it? do you know how to recycle your equity and come up with enough deposits to buy that many properties?

    What type of properties you need to buy to achieve your goals? location vs yield

  8. #8
    Join Date
    Feb 2009
    Location
    Auckland
    Posts
    176

    Default

    Spray and walk away ....

  9. #9
    Join Date
    Sep 2013
    Location
    Christchurch
    Posts
    63

    Default

    Some council's down here have had periods where they offer to sell the leasehold land for the rateable value in the past. I would possibly look at buying properties like this if I could secure it freehold as part of purchase. Avoid anything else like the plague, why do you think they are selilng it so cheap in the first place?

  10. #10
    Join Date
    May 2007
    Location
    Hamilton
    Posts
    3,613

    Default

    Hi Learning to Fly,

    No harm in investigating other options, and reviewing.

    As others have put, you won't get the capital gain as you don't own the land.

    But if the cashflow was amazing, then you could still consider, but be very careful of leasing increasing dramatically.

    Ross
    More Profit from Property? TEACH ME MORE
    Ross Barnett - Coombe Smith Property Accountants
    Proud to give the best property advice for over 13 years.


 

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