Investing in Short Lease Properties
Investing in properties with short leases is a topic that has been garnering interest among buy-to-let investors. This blog post aims to shed light on this subject, providing a detailed guide on how to navigate this investment landscape using bridging loans. Let’s delve into an example of how this deal can work, using a property with a 64-year lease as a case study.
Imagine you’ve found a flat on the market for £180,000, but it only has 64 years left on the lease. This might seem like a risky investment, but there are strategies you can employ to make this deal work to your advantage.
Strategy One: Purchasing the Freehold
The first strategy involves making inquiries through your solicitor or getting permission from the current leaseholder to talk to the freehold company. Let’s say, for the sake of this example, that you’re told you could buy the lease for £20,000.
This means your total purchase price, including the cost of the lease, would be £200,000. You might be wondering how you can finance this. The answer lies in finding the right lenders who offer buy-to-let loans.
With the right lender, you can borrow 75% to 80% of the loan-to-value (LTV) based on the £200,000 purchase price. This allows you to simultaneously complete the purchase of the property and the lease extension, borrowing off the higher value on the LTV. This strategy eliminates the need to bridge the purchase due to the short lease, allowing you to secure a standard term mortgage.
Strategy Two: Years Remaining at End of Term
The second strategy revolves around the concept of ‘years remaining at the end of the term’. Many lenders like us here at Breeze Capital stipulate that there must be a certain number of years remaining on the lease at the time of purchase, often around 80 years. However, there are also lenders who base their criteria on the number of years remaining at the end of the mortgage term.
For instance, some lenders like us here at Breeze may require 60 years at the end of the term. This opens up another avenue for funding if you can’t get the freeholder to extend the lease as part of your purchase.
In this scenario, you could use a lender that requires 60 years at the end of the term. There are even commercial mortgage lenders who require only 50 or 35 years at the end of the term. This allows you to take a mortgage on the property using one of these lenders’ criteria.
Opting for an Interest-Only Mortgage
As a buy-to-let investor, you might consider taking an interest-only mortgage. With this type of mortgage, whether the term is five years or 25 years, the monthly payment during the interest-only period remains the same.
For example, if one of the lenders requires 50 years left at the end of the term, you could apply for a five-year or nine-year mortgage on an interest-only basis. This allows you to fund the property from day one using a standard mortgage with this strategy.
Investing in properties with short leases can be a viable option with the right strategies and understanding of how we look at lending on these types of assets. If you’re interested in learning more about buying leasehold properties and the best ways of funding them, don’t hesitate to get in touch with our team. We’re here to guide you through the complexities of the property investment world.
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