Pros and Cons of Acquiring a Leasehold Property

In Kenya, a leasehold property is one where the owner holds the land for a specific period, typically 99 or 999 years. The leaseholder has the right to use, lease, or sell the property within the lease period. It is essential to verify the remaining lease term before purchasing. Leasehold properties may have conditions and restrictions outlined in the leasehold agreement, such as land use limitations or requirements for property maintenance. Buyers should thoroughly review these terms and understand their implications.

Leasehold titles are registered with the government, providing legal recognition to the ownership. However, it is crucial to involve legal professionals in the purchase process to ensure all legal aspects are properly addressed. The lessee is typically responsible for paying rent, or “ground rent,” to the lessor for the use of the land and may also be responsible for maintaining and repairing the property.

Pros of acquiring a leasehold property

Acquisition of Property in a Strategic Location Leasehold properties are strategically located within urban centers and cities where they are often well-connected, providing easy access to transportation, major roads, and essential services. This enhances convenience for residents and increases the property value.

Affordability in Prime Locations– In sought-after or prime locations where freehold properties might be scarce or expensive, leasehold options can be more feasible to secure a property in such areas. Leasehold options make it possible for a more extensive range of individuals, including those with budget constraints to live or invest in prime areas. This broadens the market and promotes diversity in the community.

Development Opportunities –Leasehold properties provide the flexibility to adapt to changing market trends. For instance, as demand shifts towards certain types of developments, leaseholders can respond to these trends by updating or redeveloping their properties. In some cases, leaseholders have the right to sublease the property. This means they can lease out all or part of the property to others, creating opportunities for additional income while retaining control over the overall development.

Homeownership –Leasehold properties often have upfront costs compared to freehold properties. This makes them more accessible to individuals who may face financial constraints when attempting to purchase a home. Leasehold arrangements may support shared ownership models, allowing multiple individuals to collectively own a property. This shared approach can reduce individual financial burdens and facilitate entry into the housing market.

Transfer of Ownership– Leasehold properties can be bought and sold. When a leasehold property owner decides to sell, they can transfer the ownership rights to a new buyer. This process involves legal documentation, including the assignment of the lease, to formalize the transfer.  The lease agreement associated with leasehold property outlines the rights and responsibilities of the leaseholder. When ownership is transferred, these rights are typically transferred to a new owner. This ensures a smooth transition in property control.

Financing– Owners of leasehold properties can use the property as collateral to secure a mortgage or a loan. This allows individuals to access funds for various purposes, such as home improvements, education, or other investments. The loan is secured by the value of the leasehold property.  Leasehold properties can be used to secure various types of secured loans, providing the owner with access to financing. These loans are backed by the value of the property, reducing the risk for lenders and potentially leading to more favorable loan terms.

Cons of acquiring a leasehold property

Difficulty In Selling – Properties with a shorter remaining lease may be less attractive to buyers, as they face the prospect of dealing with lease renewal costs and uncertainties. Buyers might prefer properties with longer lease terms for stability. Potential buyers may view leasehold properties as riskier investments due to the possibility of increasing ground rents, restrictions imposed by the landlord, and uncertainties regarding lease extensions or renewals.

Potential Rent Increases– Some leasehold agreements include clauses allowing the landlord to increase the ground rent over time. This can lead to unexpected financial burdens. The lease contracts may contain mechanisms for reviewing and adjusting the ground rent at specified intervals. These reviews might be based on fixed increases, market conditions, or other factors, giving the landlord the ability to raise the rent.

Perceived Risks– Potential buyers may view leasehold properties as riskier investments due to the possibility of increasing ground rents, restrictions imposed by the landlord, and uncertainties regarding lease extensions or renewals. The properties come with a predetermined lease period, after which the lease expires, and ownership reverts to the landowner. This limited ownership period can be perceived as a risk, especially for long-term investments.

Limited Ownership Period– When the lease period expires, ownership of the property reverts to the land owner or freeholder. Leaseholders may lose the asset they invested in, and this reversion can pose challenges for long-term planning and generational wealth transfer. The limited ownership period introduces uncertainty, especially for individuals looking for a stable, long-term investment. As the lease approaches its expiration, questions arise about the possibility of lease renewal, associated costs, and the potential need to vacate the property.

Conclusion

Leasehold properties come with a set of advantages and disadvantages that potential buyers must carefully consider. On the positive side, leasehold arrangements can provide more affordable entry points into desirable locations and offer a sense of community through shared responsibilities.

However, these benefits must be weighed against the potential disadvantages, such as limited ownership periods leading to uncertainties, and the risk of rent increases. It is imperative for individuals interested in leasehold properties to conduct thorough due diligence, review lease agreements diligently, and seek professional advice to make informed decisions aligning with their long-term financial goals and preferences.

 

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