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Freehold Property vs Leasehold Property – Which One Will You Buy?

Imagine that there are 2 shop offices on sales where one is under freehold and another is under leasehold. As a property investor, which one will you buy?

Freehold Property vs Leasehold Property - Which One Will You Buy? Click To Tweet

In fact, a property under freehold is always have the better appreciation in long run compare to leasehold property. But do take note that, tenant is the main key to determine whether how many profits you can earn from either freehold or leasehold property. As the tenant will concern about the property visibility, traffic flow and other factors that can generate for businesses to them. So, no matter you buy a freehold or leasehold property, always search for the property that can attract the tenant to rent your property in long-term.

Besides, as we mentioned that the appreciation of leasehold property is lower than freehold ones, hence, you will have to make sure that the short-term returns for your leasehold property are at least 1% – 2% higher than similar freehold property.

Freehold Property vs Leasehold Property

Let’s have an example as below:

1.

Shop Office

Asking Price

Freehold

RM 1.5 million
Leasehold

RM 1.4 million

Note: Leasehold shop office have 85 years lease left

2.

Rentals  RM 9,000/ month or RM 108K/ year for each shop

 

3. Assumptions

The capital appreciation of freehold property is additional 1% p.a. over leasehold property. (exclude all the costs such as stamp duty, legal fee and etc)

4. Monthly loan repayment

Assume that the loan repayment is equal to the rental @ RM 108K/ year, and, with fixed interest rates @ 8% p.a. for 20 years loan tenure, and the loan repayment will be RM 1,060,359 in total.

5. Amount and Percentage of Down Payment (D/P) needed to achieve Zero Cash Flow

For example: Total 12 months rent – Total yearly installment = Zero

(a) Freehold property

D/P (%) = (Asking Price – Loan / Asking Price) x 100%

= (RM 1,500,000 – RM 1,060,359 / RM 1,500,000) x 100%

= (RM 439,641 / RM 1,500,000) x 100%

= 29.3%

(b) Leasehold property

D/P (%) = (Asking Price – Loan / Asking Price) x 100%

= (RM 1,300,000 – RM 1,060,359 / RM 1,300,000) x 100%

= (RM 239,641 / RM 1,300,000) x 100%

= 18.4%

6. The short-term yields are:

(a) Freehold property

(Annual Rental / Asking Price) x 100%

= (RM 108,000 / RM 1,500,00) x 100%

= 7.2% p.a.

(b) Leasehold property

(Annual Rental / Asking Price) x 100%

= (RM 108,000 / RM 1,300,00) x 100%

= 8.3% p.a.

Since the freehold property will be appreciated additional 1% p.a. over leasehold property, this is just good to make up for the shortfall in the annual rental yields.

In conclusion, freehold and leasehold property are equally good as long as the returns are ideally.

So, what do you think? Leave a comment below to share your thought with us.

–WMAPROPERTY

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