Today I went to see a flat on an estate close to Crystal Palace, London. I knew the estate having been there earlier in the year to view an auction property. The estate was in reasonable condition – although on my second and more recent visit I noticed that the estate had got scruffier over the past 6 months. It didn’t help that when I parked my car, I noticed the car next to me had, had the window smashed in….This rang alarm bells.
When you are buying a flat you are only buying part of the building. You are buying a lease which gives you permission to use your particular flat for a certain number of years. The rest of the building (i.e. the hallways, roof and any communal gardens etc) and the land the flat is built on will be owned by the Freeholder. The Freeholder is not necessarily someone who lives in one of the flats – the Freeholder may be a person/company who lives many miles away and who has never even seen the flat!
Buying the Freehold to a building is a very specialised type of investment and is known as “Ground Rent Investment”. This type of property investment is seen as a long term income yielding investment. This is because most flats have to pay an annual “ground rent” – that is, each flat owner (leaseholder) has to pay an annual rent to the Freeholder for the land (or ground) which the flat is built on. This can range from as low as a few pence per year to many thousands per year. As a leaseholder of a flat you will normally also have to pay a service charge – this is a charge for the maintenance, repair and upkeep of the building. This is usually undertaken by a management agent who will oversee that the gardens are kept tidy, hallways are kept clean and so on.
When you buy a flat – you only have control over your four walls – outside your door – in the hallway, the paths, the gardens etc this is usually managed and maintained by someone else. That means what the rest of the building and common areas are like is really important. You will only have so much contriol over these – but will have to pay towards them. That means that you have to be sure that the service charge you are paying every month is actually going into the maintenance and repair of the building.
You will see many flats go to auction which have absent freeholders or no management companies – what this means is that nobody is looking after the maintenance of the building or ensuring the buildings insurance is in place. This is a key issue which affects the price of a property and you will struggle to get a mortgage on a property which has an absent freeholder or no management company in place.
So back to my 2 bed flat in Crystal Palace, London….
Well the communal hallways left a lot to be desired – some carpet would be nice rather than a bare floor:
The grass had been cut – but I hope somebody had organised to move that sofa:
But the deciding factor for me – was the still smouldering burnt out garage – this did not feel the sort of estate I wanted to be a long term investor in.