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  1. #1
    Join Date
    Jan 2007
    Location
    Napier
    Posts
    36

    Default Sub-dividing Leasehold property?

    Hi guys, long time reader first time poster..

    I'm 27 and looking to buy my 2nd investment property; a leasehold property in a good area in Napier. Normally a house like this would sell freehold for $365,000ish (because the one next door to it is exactly the same, stucco, 800m2 section) and sold mid last year for that. For this one they are asking $255,000 with a C.V of $295,000 but leasehold.. I think this scares a lot of people off since the lease is up for renewal in september 08 with the potential of the lease skyrocketing up. Am interested to hear any feedback of people who have sub divided leasehold and am interested in particular how to sell/value the section to be sold at the rear if there are no improvements on it??

    I was going to live in the house as it is nicely done up inside whilst i did the associated preparation for sub dividing (constructing a new garage at the front and moving the para pool, the fencing.) and then rent it out. Would it be more wise to go in with a second investor to build a new home on the back and rent them both out? Or just sell the back with the new house on it? How do the council determine the lease costs when it is subdivided?

    Thanks

  2. #2
    Join Date
    Apr 2006
    Posts
    4,018

    Default

    I'm confused. Do you mean cross-lease??? You talk of a lease coming up for renewal in Sept 08. Surely you can't subdivide and sell part of a section you are leasing?

    Paul.

  3. #3
    Join Date
    Jan 2007
    Location
    Napier
    Posts
    36

    Talking

    Hey SuperDad, maybe cross-lease is what its called instead of sub-divide? I'm not sure, but what i what to know is can you do this to a leasehold property and build another separate title on the back section or would i have to 'freehold' the land 1st?

    Cheers

  4. #4
    Join Date
    Apr 2006
    Posts
    4,018

    Default

    My understanding is that you need to own the land before you can subdivide of crosslease parts of the land.

  5. #5
    Join Date
    Apr 2005
    Location
    Wellington
    Posts
    1,584

    Default

    You can't subdivide land which doesn't belong to you. You'd need to approach the landowner to purchase the land first.

    Personally, I have had quite alot of experience with leasehold land and I wouldn't recommend it. The value of your dwelling remains pretty static but the value of the land will increase. This means your ground rent keeps going up. The landowner is the real winner and you're just along for the ride.

    If you were to go for it, you'd need to factor in what the bare piece of land is worth, then add a risk margin and deduct the total from what the freehold would be worth.

    Another way of looking at it is if that house you're looking at was sitting in a house movers yard would you pay $255k for it? Because that is effectively what you are doing, that is all you own. The extra $200k you are paying is goodwill.

    The only times I really made money on my leasehold properties were after I purchased the land from the landowner. I think that pretty much sums it up.

    Cheers,

  6. #6
    Join Date
    Mar 2005
    Location
    Sunny Hawke's Bay
    Posts
    118

    Default

    First you need to buy (own) the land before you can subdivide it. If you're working thru an agent they can help with this process and/or tell you who to go to -- probably harbour board or council in Napier, depending on who owns the land. Once you've pruchased the land at market price, you can then subdivide it which in Napier costs about $30K after contribution, getting services to the boundary of the new section, survey co and lawyers.

    Personally, I have trouble making the numbers work on sections like this, but that really comes down to the costs and margins you're willing to accept.

  7. #7
    Join Date
    Jan 2007
    Location
    Napier
    Posts
    36

    Default

    Thanks for the excellent replies! I can see that this would not stack up at all if i had to buy the land out right. It was one of the agents top features, 'fully surveyed for subdivision', haha yep they surveyed it but that's about it by the sounds.

    I like what was said about effectively paying $255k for the house, but i guess it wouldn't take into consideration the exclusive rights to that section or the goodwill of the location.

    Also, isn't leasehold - in the eyes of a rental investment - quite good due to the complete purchase price being depreciateable? Since can normally only depreciate improvements, but in this case the whole amount! Does this have any bearing on the tax position or effectiveness of leasehold?

  8. #8
    Join Date
    Nov 2005
    Posts
    3,286

    Default

    Quote Originally Posted by slackadave View Post
    Thanks for the excellent replies! I can see that this would not stack up at all if i had to buy the land out right. It was one of the agents top features, 'fully surveyed for subdivision', haha yep they surveyed it but that's about it by the sounds.

    I like what was said about effectively paying $255k for the house, but i guess it wouldn't take into consideration the exclusive rights to that section or the goodwill of the location.

    Also, isn't leasehold - in the eyes of a rental investment - quite good due to the complete purchase price being depreciateable? Since can normally only depreciate improvements, but in this case the whole amount! Does this have any bearing on the tax position or effectiveness of leasehold?
    Slack,

    In the context of property, improvements means improvements to land, ie the buildings on the land. It does not mean the cost of tarting up an existing building/s.

    Also, it sounds like there may be more to this than a simple leasehold piece of land if it is advertised as surveyed for subdivision.

    xris

  9. #9
    Join Date
    Mar 2005
    Location
    Sunny Hawke's Bay
    Posts
    118

    Default

    Also, it sounds like there may be more to this than a simple leasehold piece of land if it is advertised as surveyed for subdivision.

    xris

    Yeah, the only "more" to it is that the agent conveniently forgot to mention that you have to BUY the land first, a selling tactic way too often used in Napier!

    If ever a house looks WAY under value, you can pretty much guarantee one phone call will reveal it's on leasehold land. The listing agent should be able to tell you the cost to buy out the lease.

    .

  10. #10
    Join Date
    Jan 2007
    Location
    Napier
    Posts
    36

    Default

    Turns out the agent was basing his sub dividing ideas on a builder that was going to buy it and build on the back. It was going to cost $150K to freehold and could get $280K for the front house if subdivided, effectively just buying an overpriced chunk of a section for $140+k

    Oh and the lease is going up to between $6,000 and $8,000 next year! But i suppose that's cheaper than a $140,000 mortgage


 

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