Kiwification

photo credit: umjanedoan

“Leasehold” properties were something I’d never heard of until we moved to New Zealand. If you buy a leasehold property, the building is yours, but not the land. You pay a yearly “rent” to the land owner (either the Council, or the Harbor Board here in Hawkes Bay).

New immigrants generally are confused and put off by the leasehold option, but understood and used correctly, it can be better and cheaper than buying freehold. (”simple fee”)

Features of leasehold properties

• Leases are renewed (and rent goes up) every 21 years.
• A leasehold near the end of its lease will have a relatively low monthly rent.
• A leasehold property can be “freeholded” by buying the land from the lessor.
• If an owner “freeholds” a property, he’s given a 30% discount on the value of the land. (At least in Napier)

Caveats of leaseholds

• Because the lease period is 21 years, a leasehold property near the beginning of its lease will have a relatively steep monthly rent.
• Lease increases are in line with property value growth over 21 years, so the average lease increases 400% on renewal.

When is New Zealand leasehold a worthwhile option?

If you’re buying for investment, and the lease has a medium to long term until renewal

A landlord doesn’t particularly care if the land belongs to him or not. He’s able to charge the same weekly rent for the building, regardless. Leasehold means he can buy a better property, which will yield a higher rental income, for a lower price than a freehold property.

If you’re expecting a windfall before the renewal period of a short lease

If you’ve recently moved to New Zealand, you may be expecting some extra cash within the next few years. Buying a soon-to-be-renewed leasehold property would allow you to get a more valuable property for a lower price, pay minimal yearly rent, and then to freehold the land once your cash arrives.

Leasehold example

Imagine I have the choice of two (identical) houses:

• House A is freehold, selling at $300,000.
• House B is leasehold, selling at $200,000. The lease is $1500 / year, and it’s renewed in 5 years.
• I’ll get a 100% mortgage, at current interest rates (9.7% fixed for 2 years, with 25-year term)

What’s the difference?

• If I buy house A, I’d pay $2,664.88 per month in repayments.
• If I buy house B, I’d pay $1,776.61 per month. My lease payments would be $125 per month. My total monthly payments would be $1901.61

Caveat: When the lease was renewed at 400%, I’d be paying $500 per month in rent. That brings my monthly payments up to $2276.61 (Of course, in 21 years time, $500 per month will be nothing…)