Freehold vs Leasehold Property
When investing in commercial property, you usually come across
two important terms: freehold and leasehold. These words are important. Let us explain further.
When we refer to freehold, which refers to owning the whole property, this includes the building on the land. You can change the property by following the local government’s rules and regulations. The best part? Your ownership doesn’t end after a particular time.
You can even rent the property out to get rental income or run your own business from it.
How can freehold property can work for you?
Examples of how freeholds can work for you include the following situations that have worked for our clients.
One. Redevelop the property to the highest and best use. This could be a refurbishment or totally
redevelopment for other highest and best uses.
Two. Finding a new type of higher-paying tenant to increase rental return and ultimately improve capital/property value. This can be done through refurbishing and rebranding/repositioning.
Three. Running a business from the property and then onselling it to a business to provide an excellent passive income as it becomes an investment.
We give examples of the above and others in our book “Commercial Real Estate Investment For Residential Investors, ” available from Amazon Books. There is a link below this video.
What are the advantages of leaseholds?
Leasehold is when you only have the rights to a particular property for a certain period. This is the time allocated in the contract of lease. You’re only allowed to use that property for the lease period, which can be renewed or extended by negotiation under the terms outlined by the lease contract.
Leaseholds are very common for businesses. The advantage is the initial outlay. This can allow the business to test out a specific location for a bit of time and then have the option of possibly quickly expanding to other sites or renewing the lease under the lease terms. By negotiation with the landlord or freehold property owner.
Examples of this could be restaurants, hotels, childcare centres etc.
Another advantage of leaseholds is that they can be passed on to a new party, i.e. sold as a business subject to landlord approval. Most states and countries have regulations protecting leasehold owners’ rights to sell the business as long as it is proven that the business buyer has the Financial and business capacity to run it.
How do you value leaseholds?
Generally, the longer the lease, the higher the value of the leasehold to be sold. Suppose a particular restaurant has a market value of, say, 2:1, i.e. twice the annual profit on a 6-year lease, it could be worth 3:1 over a 10-year lease because the owner has longer to recoup the buying price, thus more time to make a good profit one rte remainder of the lease.
So, even though leaseholds can be transferred or owned by different people or lessees over a period of time, the actual lease remains on the title of whoever owns the freehold property.
Need to discuss how freeholds and leasehold can work for your commercial investment property? Feel free to contact Con Tastzidis at CST Properties for a no obligation free chat
Written by Con Tastzidis
Con is Managing Director of multi award-winning Commercial Real Estate brokerage and consulting company CST Properties since 2001.
With over 40 years of hands-on experience, Con Tastzidis has etched an indelible mark in the Hotel, Tourism and leisure commercial property and business sectors. Having engaged with national and international hotel and property companies/owners, Con possesses a profound understanding of the intricate dynamics that drive success in this arena.
Con is the author of several books, including Amazon top-selling book “Real Estate Investing For The Residential Investor-The- The 7 Myths of Commercial Real Estate Explained”. In this book, Con outlines many of the successful outcomes he has achieved in both good and adverse economic conditions for his clients. More importantly, how working with Con can work for you. Con has been featured in many national and international media outlets, including FOX, CBS, NBC, ABC, CNN, and BLOOMBERG.
If you would want to work with Con, he can be contacted through this link Feel free to contact Con Tastzidis at CST Properties.