Unlocking the potential of short lease flats

By Jason Patterson, J Patterson Properties Mentoring

Investors have a variety of strategies to consider to help them build a robust property portfolio. One often overlooked but potentially highly lucrative method is investing in short lease flats. While these properties come with their own challenges, they also offer an opportunity for strong returns.

Short lease flats – an introduction

A short lease flat is a property with a lease term typically less than 80 years. Properties with short leases often sell at a significantly lower price compared to those with longer leases, presenting an opportunity for investors. The key to these properties lies in extending the lease, which can significantly increase the property’s value.

Why invest in short lease flats?

1. Lower purchase price: Short lease flats are often priced lower than similar properties with longer leases, allowing you to enter the market at a reduced cost.
2. Value uplift: Extending the lease can increase the property’s market value, offering a strong return on investment.
3. Flexible exit strategies: You can choose to sell the flat after extending the lease, rent it out, or even refinance it to release equity for further investments.

Strategies for investing in short lease flats

There are several strategies to consider when investing in short lease flats. Here are some of the most effective:

1. Buy, extend, and sell: Purchase a flat with a short lease, extend the lease, and then sell the property at its new, higher market value.
2. Buy, extend, and rent: Extend the lease and rent out the property through various avenues such as buy-to-let (BTL), serviced accommodation, or social housing.
3. Direct purchases and financing: Acquire properties through estate agents, auctions, direct from vendors, or even councils and housing associations. Financing options include mortgages, bridging finance, and cash purchases.
4. Reconfigure and refurbish: Enhance the property’s appeal and value through reconfiguration and refurbishment, making it more attractive to potential buyers or tenants.
5. Buy and not extend: You can buy a flat with a short lease with cash but not extend the lease. Rent will then cover the overall cost.
6. Buy the freehold: Purchase the freehold of the building and extend your own lease, or even convert and sell the flats with new, long leases.
7. Assisted sale: Partner with the current owner, extend the lease, refurbish the property, and then split the profit upon sale.

Critical elements to get right

When dealing with short lease flats, there are important elements you need to consider:

1. Purchase price: Make sure you buy at a competitive price to leave room for profit after the lease extension and refurbishment.
2. Lease extension cost: Accurately estimate the cost of extending the lease, which can vary based on the remaining lease term and property value.
3. End value of the flat: Assess the potential market value of the flat post-lease extension and refurbishment.
4. Refurbishment and reconfiguration costs: Budget for any necessary refurbishment and reconfiguration to enhance the property’s appeal and value.

Financing your short lease flat investment

There are various ways to finance your investment in short lease flats:

1. BTL mortgage: Suitable for properties that will be rented out post-lease extension.
2. Bridging finance: Provides short-term funding to purchase and refurbish the property before refinancing or selling.
3. Cash purchase: Ideal if you have the funds available, allowing you to negotiate better deals and avoid financing delays.
4. Joint ventures and crowdfunding: Partner with other investors to pool resources and share risks and rewards.
5. Lease option agreement: Secure the right to buy the property at a later date, often with some of the rental income going towards the purchase price.

Finding short lease flats

Locating the right short lease flats means you have to be proactive. Here are some ways to find them:

1. Property portals: Websites like Rightmove, Zoopla, and OnTheMarket list short lease properties. As well as software such as Property Filter and Nimbus Maps.
2. Local estate agents: Build relationships with agents who can notify you of short lease flats before they hit the market.
3. Property associates and networks: Leverage connections within property investment communities.
4. Auctions: Both pre-auction and post-auction offers can yield great deals on short lease flats.
5. Direct from councils and housing associations: These organizations sometimes sell properties with short leases.

Calculating lease extension costs

Determining the cost of extending a lease is crucial for budgeting. Here are a few ways to do so:

1. Solicitor or Surveyor: Engage a local professional to provide an accurate lease extension quote.
2. Online calculators: Use tools available on various websites to estimate the premium.
3. Direct contact with freeholder: Obtain a quote directly from the freeholder or through negotiation.

Steps to extend a lease

Since the recent Leasehold and Freehold Reform Act, you can extend the lease on a property as soon as you purchase it, rather than waiting for two years, as was previously the rule.

1. Contact the freeholder: Start by reaching out to the freeholder for a lease extension quote.
2. Negotiate and agree: Negotiate the premium and terms, then agree on the lease extension. There are two main paths to a lease extension.
   1. Voluntary lease extension
   2. Section 42 notice: A Section 42 Notice is a formal request from a leaseholder to the freeholder or landlord (or both) and any other appropriate party to extend their lease on a property. This provides a leaseholder with an extension of up to 990 years on top of the remaining lease term and a ground rent reduced to zero.
3. Legal documentation: Your solicitor will handle the necessary paperwork and register the new lease with the Land Registry. The main lease extension documents are:
   1. Deed of substituted security – This is the document that relates to the mortgage lender to inform them of the lease extension
   2. Counterpart deed of variation – The new agreement in relation to the lease between yourself and the Freeholder

Fees you will need to pay

1. Solicitors’ fees: Both your solicitor’s and the freeholder’s solicitor’s fees (subject to change from 24 May 2024).
2. Surveyor’s fees: If a surveyor is needed for valuation rather than a desktop assessment.
3. Lease extension premium: The cost agreed upon with the freeholder for extending the lease.

Investing in short lease flats can be a profitable strategy for building your property portfolio, provided you understand the intricacies involved. By purchasing at a discount, extending the lease to unlock value, and choosing the right exit strategy, you can achieve strong returns. With careful planning, good research, and the right financial backing, short lease flats can be a cornerstone of a successful property investment strategy.

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