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I've been looking a properties in a reasonably large mining town.
A lot of the properties for sale are offered on a leasehold basis, rather than a freehold.The differences sound obvious, but what does it really mean?
Does it mean if I purchase leasehold, then the land really isn't mine??
Thanks
RLYes.
What might be a consideration is if the mining company has future plans to mine the land under the building.
You need to know the term of the lease. They are 99 years to 999 years and can be less due to remaining time left.
I know the power companies that mine coal in Victoria lease the surrounding land to farmer so they can mine the coal when the need arises in the future.The value will be greatly determined by the conditions of the lease eg term remaining, lessor rights to terminate, lessor right to approve structures & alterations, requirement to remove improvements, right for assignment of lease etc. You will need to do your research to ascertain the company's plans for expansion etc.
What are you buying right to use vacant land or land with a building?
Scott No Mates wrote:The value will be greatly determined by the conditions of the lease eg term remaining, lessor rights to terminate, lessor right to approve structures & alterations, requirement to remove improvements, right for assignment of lease etc. You will need to do your research to ascertain the company's plans for expansion etc.What are you buying right to use vacant land or land with a building?
Thanks for that. I'm looking at buying a house at Blackwater (mining town, Qld) to rent out. The excellent rent return should nicely offset one of my properties that is very negatively geared.
The concept of leasehold vs freehold is very new to me (never heard of it outside London!)I'd appreciate any thoughts you have on the Blackwater plan.
Sorry but I have no idea about Blackwater but past experience with leasehold is that you will need to undertake detailed cashflow analysis with NPV & DCF calcualations. You need to consider whether you will own the improvements and whether you are liable to remove these at the end of the lease. Consider your payback period, term of lease remaining. That is, at the end of the lease you are faced with negative value ie cost of removal with no tenure, so you before you make any profit it is necessary to make the cost of the improvements & demolition before you can say that you have a return on the property.
Eg if there are 20 years remaining, leasehold will cost $210, house is worth $140k, demo $14k, you will need to make $8k pa to pay for the improvements (this is already 4%, but you will require a higher rate of return to justify the investment considering that you will be up for all of the standard holding costs plus land tax as you have an equitable interest and these costs can be passed onto leasehold as it is not a standard lease for a house).
On face value, the returns will generally look great, positively geared etc however you will need to do serious due diligence to determine whether there is a dollar to be made over the period.
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