Freehold vs. Leasehold Property Investments in the UK - Which is Better in 2024?

You may have heard of freehold and leasehold properties before, but which is the best investment choice in 2024? Each offers benefits and drawbacks depending on the specific type of property and your own investment goals – in this blog I will take a look at both kinds of property and detail the pros, cons and everything you need to know before making a decision.

Table of Contents

Investment Options: Defining Ownership Structures

Freehold Properties

A freehold property means that the owner of the property also owns the land it is built on, including gardens and other outdoor spaces. Freehold properties are usually houses rather than flats. You will not have to pay ground rent or any other leases on a freehold property.

Leasehold Properties

A leasehold property means the owner of the property does not own the land it is built on, this remains the property of the freeholder. Leaseholds are very common with maisonettes, flats or apartments, but some houses are leaseholds too. Leasehold properties with outdoor spaces remain the landlord’s property and are responsible for maintenance, for which you may have to pay a service charge. Leaseholds can last between 125 and 999 years but there can also be shorter leaseholds for 50 or fewer years.

FAQ: What is a Commonhold Property?

Commonhold is a form of ownership for flats in which each flat is a freehold property, but all owners are part of a commonhold or resident’s association and manage the common parts of the property such as external walls, roofs and communal areas. This is an alternative to traditional leaseholds in apartment buildings and gives flat owners more control over the management of their property.

Benefits and Drawbacks of Each Type of Property

There are many benefits and drawbacks to freehold and leasehold properties that can affect the return on your investment.

Pros and Cons of Leasehold Properties

Pro: Leaseholds generally have a lower purchase price than freehold priorities per square metre.

Pro: The owner of a leasehold property is not usually responsible for building maintenance or insurance, as this responsibility falls to the freeholder.

Pro: Some leasehold properties offer other benefits like a concierge service in apartment buildings, which is especially helpful if the property investor lives elsewhere.

Pro: Leaseholds offer more options for investment, as many leasehold properties are in highly desirable locations such as city centres, offering potentially higher rental yields.

Con: You have to pay ground rent and services charges to the freeholder, which could increase over time. The Leasehold Reform (Ground Rent) Act 2022 was intended to prevent landlords from charging ground rent of more than a peppercorn for leasehold properties sold after 30th June 2022, but following the general election announcement, this law was rushed through without the ground rent cap.

Con: you will need permission from the freeholder to make any changes to the property such as adding an extension or changing the structure or layout.

Con: It can be hard to sell a leasehold property, especially if the lease is running out.

Con: Extending the lease can be difficult, although the new Leasehold and Freehold Reform Act may change this – see later in this article for more on this new law.

Con: Conveyancing may take longer and cost more on a leasehold property as there is more paperwork involved.

Con: Some leasehold properties have certain restrictions, such as no pets allowed, no short-term lets, or not being able to run a business from the property.

Pros and Cons of Freehold Properties

Pro: Freehold properties offer unending ownership of the land the property is built on, so there is no need to worry about the lease running out.

Pro: Freehold properties tend to have a higher resale value.

Pro: There is no ground rent or service charges to pay, although all the maintenance will fall to you as the property owner.

Pro: You have the freedom to add extensions, loft conversions and more to increase the property value without needing permission.

Con: Freehold properties are usually more expensive than equivalent leasehold properties.

Con: With freehold properties, you are responsible for maintaining the fabric of the building such as the roof and exterior walls, as well as the garden or other outdoor space.

Con: Most flats or apartments are leasehold properties, so this can limit your choices if you are looking to invest in flats.

Factors Influencing the ROI of Leasehold and Freehold Properties

Property Type

The type of property affects the ROI of freehold and leasehold properties, as it is expected for flats, apartments and maisonettes to be leasehold, whereas a leasehold house is less desirable as an investment.

Lease Length

A lease of 999 years is pretty stable, whereas a lease that is running out within 50 years or less can make a property very hard to sell.

Market Conditions and Current Trends

Prices of houses and flats are buoyant and expected to continue rising over the next 5 years, making this a good time to get into property investment before prices rise even higher. More people are returning to live in cities following the post-pandemic exodus, especially young professionals and students, making inner-city leasehold flats and apartments an attractive investment prospect. The new Leasehold and Freehold Reform Act has not yet been implemented but this will ban leaseholds on houses within the next 2-3 years.

FAQ: What effect will The Leasehold and Freehold Reform Act have?

This is a new law introduced by the Conservative government which did receive Royal Assent, although at the time of writing its future is unclear as Labour has now won the general election. The Act is still not in effect and is expected to be rolled out between 2025 and 2026. The main aims of The Leasehold Reform Act are:

Banning the sale of new leasehold houses – every house in England and Wales will be a freehold property.
Standard lease extension terms will be 990 years and leases will be cheaper to extend.
Leaseholders will be granted greater transparency over their service charges.
Leaseholders can take over management of their building, similar to the commonhold ownerships mentioned earlier in this blog.
Leaseholders will not have to pay their freeholder’s legal fees when challenging poor practice.
Leaseholders no longer have to own their property for 2 years or more before they can extend the lease or buy the freehold.

Investment Considerations

The right type of property to invest in is the kind that fits your investment goals. If you are keen to invest in inner-city flats and get those high rental yields, then a leasehold flat is a good choice for you. If you would rather have a stable long-term investment, then a freehold house is a better option. Do bear in mind the upcoming changes in leasehold laws due to the recently passed Leasehold Reform (Ground Rent) Act 2022 and the upcoming Leasehold and Freehold Reform Act can affect investment opportunities and potential ROI.

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