Investing in a Short Lease Property: What You Need to Know.
When investing in a short lease property, it is crucial to weigh the pros and cons carefully. This decision can have long-term financial implications, but with the right strategy and understanding, it can also present unique opportunities.
Purchasing a property is one of the most significant investments one can make.
Here, we delve into the benefits and drawbacks of investing in a short lease property and explore financing options, including the use of a bridging loan for both the purchase of the property and the cost of the lease extension.
The Pros of Investing in a Short Lease Property
Lower Purchase Price: One of the most attractive aspects of purchasing a flat with a short lease is the lower purchase price. Properties with shorter leases tend to be significantly cheaper than those with long leases. This can be a golden opportunity for first-time buyers or investors looking to enter the property market at a lower cost.
Potential for Lease Extension: Extending the lease can significantly increase the property’s value. Once the lease is extended, the flat can often be sold for a much higher price, making it a lucrative investment. This potential for value appreciation can be an enticing prospect for savvy buyers.
Negotiation Leverage: Buyers of short lease flats often have more negotiating power. Sellers may be more willing to accept lower offers, especially if the property has been on the market for a while. This can result in a better deal for the buyer.
Entry into Desirable Areas: Properties with short leases might be located in highly desirable areas where longer lease properties are prohibitively expensive. This allows buyers to own a home in a prime location that they otherwise might not afford.
The Cons of Investing in a Short Lease Property
Lease Extension Costs: Extending a lease can be expensive and involves legal and administrative fees. The cost can be prohibitive, especially if the lease has less than 80 years remaining.
Mortgage Challenges: Securing a mortgage for a flat with a short lease can be challenging. Lenders often view properties with less than 80 years remaining on the lease as un-mortgageable.
Depreciating Asset: A short lease means the property’s value is likely to decrease over time if the lease is not extended. This can make it harder to sell in the future and may result in financial loss if the lease extension is not managed properly.
Potential for Increased Service Charges: Some properties with short leases might come with higher service charges, especially if major works are planned. This can add to the overall cost of ownership and reduce the financial benefits of the lower purchase price.
Funding a Purchase and Lease Extension with a Bridging Loan
One viable solution for financing the purchase of a flat with a short lease, as well as the lease extension, is through a bridging loan. Bridging loans are short-term loans designed to provide quick funding until longer-term financing can be arranged.
Quick Access: Bridging loans offer quick access to funds and are known for their fast approval and release of funds. This can be particularly beneficial in competitive property markets where speed is essential.
Flexibility: These loans are highly flexible, allowing borrowers to use the funds for various purposes, including the purchase of the property and covering the lease extension costs.
No Monthly Repayments: Some bridging loans offer the option to roll up interest payments, meaning there are no monthly repayments. Instead, the interest is paid in one lump sum when the loan term ends. This can ease immediate financial pressure during the lease extension process.
Securing a Bridging Loan: To secure a bridging loan, borrowers typically need to have a clear exit strategy, such as refinancing with a traditional mortgage once the lease is extended or selling the property at an increased value. The loan is usually secured against the property, and lenders will assess the property’s potential value post-lease extension.
Reach out and give us a call, at Evolve Finance we are bridging loan experts and understand the complexities in arranging finance for flats with short leases and can guide you through the intricacies of the process, helping you explore all available options.
Making an Informed Decision
Purchasing a flat with a short lease is not a decision to be taken lightly. It requires careful consideration of the financial implications and a clear strategy for extending the lease.
While the lower purchase price and potential for increased property value post-extension can be highly attractive, the costs and challenges associated with lease extension must not be underestimated.
Using a bridging loan to finance both the purchase and the lease extension can be an effective solution, offering flexibility and quick access to funds. However, it is essential to have a well-thought-out exit strategy and to understand the terms and conditions of the loan fully.
Conclusion
In conclusion, purchasing a flat with a short lease can be a strategic move for those willing to navigate the complexities involved.
With thorough research, careful financial planning, and the right financing options, it is possible to turn a short lease property into a valuable asset, ensuring both immediate and long-term financial benefits.
By staying informed and proactive, buyers can make empowered decisions and capitalize on the opportunities presented by short lease properties.