Intro and probably a stupid question!

[Learning to Fly]

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!

[drelly]

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?

[Learning to Fly]

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.

[PC]

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).

[Rosco]

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

[elguapo]

Leasehold properties, is this something we really should avoid?!

Leasehold is all the worst aspects of property, without the good part. Avoid.

[PTILoveYou]

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

[shanecarruthers]

Spray and walk away ....

[Norwest]

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?

[Rosco]

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

[artemis]

Often there is low demand for leasehold properties, so you may strike a desperate vendor who will accept an offer low enough to make the numbers work. Might pay to check out places longest on the market.

If you can find something cash flow positive, even a little, you have tenants paying off the mortgage and expenses, thus building your equity. Sure there could be issues later, but that can be the case with any property. And at least the lease and possible resale issues are known.

And lease payments are tax deductible which helps.

There are scary stories in the press from time to time. But loads of leasehold properties are owned, lived in, bought, sold without major problems. So, just saying look more deeply into it before just writing it off as an option.

[Learning to Fly]

Hey thanks for the thoughts and ideas, much appreciated. I'm sure we aren't the first ones in this situation, struggling to get started on their first house, I wonder if the first one is the hardest due to self doubt.

We have been working on plan over the past week or so, I guess we need to commit to getting it down on paper and go forward from there.

[klauster]

I would say – you are doing well, working through pros & cons.
More important is learning by doing.
If nobody buys that lease hold, you get it for a very good price. I did it – good cash-flow, and later I could buy the land, too. Everything has worked out – just do your homework.

[Learning to Fly]

Amazing how things can happen so quickly, one day you are despairing at ever finding the 'right' property, next minute it pops up right in front of you!

Last night we viewed a house and this morning have put an offer in. It's a 3 bedroom elevated home, garage with internal access, newish kitchen and bathroom, good carpet, curtains etc. Even better is that it is on a 944m2 section with the house at the back so very good subdivision potential, or just to put another dwelling on for two streams of income. It is up for sale due to a marriage break up, has only just come on the market and the vendors are VERY keen to sell. Fingers crossed all goes through!