The economics of extending a lease

System

90 year period? What's left of the lease would be sold at auction for a pittance. If you had 90 years maybe, but the calculation would be different if you don't have 90 years

Most of your compounded gains will be in the latter years, unless you made safe with bonds

System

The legal fees are wrong of course, but it's probably only going to be your problem once, and for 500tho you could have houses outside of London. It's less of a rip off than rental tenants get

But yes, investing generally better than property, leverage can make property better but only if you want to remortgage to release that capital

System

Suppose you extend, then remortgage to release value, and then invest what you release

You can't usually borrow specifically to invest in s&s ISA, but you could borrow to say clear 0% cards that you leveraged your isa with, and then take out new cards

GreatApe

MatthewAinsworth wrote: »

90 year period? What's left of the lease would be sold at auction for a pittance. If you had 90 years maybe, but the calculation would be different if you don't have 90 years

Most of your compounded gains will be in the latter years, unless you made safe with bonds

The math works out much better for longer leases and much better for shorter leases. I choose 90 years as it seems to be a near worse case

For instance if you only had 50 years left you have to pay the freeholder NPV plus £5k solicitors/surveyors costs + marriage value.

If you had 500 years left on the lease you pay NPV which will be tiny but still a large £5k for the professional fees.


The risk seems to be if an investment can be made that will return 5% above inflation (or rather 4.14% above inflation for the example flat/costs I gave above even less with the capital gains loss tax rebate)

GreatApe

Using the example of 60 year lease left, the MSE lease calculator suggests £57,000 + £5,000 legals for a £500,000 flat with £0 ground rent

£62k into an ISA for 60 years at 5% annual real return = £1,160,000 in todays money

£500,000 vs £1,160,000 plus you get a ~£150,000 capital loss tax credit


Using the example of 130 year lease left, the MSE lease calculator suggests £1,000 + £5,000 legals for a £500,000 flat with £0 ground rent

£6k into an ISA for 130 years @ 5% real annual return = £3,410,000 in todays money

£500,000 vs £3,410,000

GreatApe

Also interestingly lets say we enter a world of 0% rates and freeholders argue that the NPV should be calculated with 0% in mind and lets say they get a court to agree.

Then to extend a lease on a £500,000 flat for 90 years would cost..... £500,000

Crazy. Flats would take an instant nose dive and be unsaleable

System

You probably don't have 90 years to invest, 60 at best, compounding is important but a shorter time = less compounding

When you pass on in say 60 years the flat will probably be sold with an unmortgageable lease, depreciation will accelerate

The difference important and it may still be worth it
And look at more aggressive investments than all this 5% business, like vanguard lifestrategy 100, or small caps, especially for such a long time frame.

If you borrow from the mortgage to pay for the lease extension your day to day cashflow to invest will be largely untouched.

And remember the value if being able to release equity by mortgage to invest (indirectly of course)

System

If freeholders got too greedy it'd be a political issue and gov would act

May be better to do it while you have more certainty?

GreatApe

I probably will extend my lease, However mathematically it seems to be better to just put the cash elsewhere as long as 5% returns could be gained. I think the investment could be de-risked by investing in the same asset class eg REITs

So while not extending the lease would mean forfeiting the flat in 90 years, buying £13k of UK REITs at 5% yield would mean that by year 90 I would own £1 million in REIT shares but lose a £500,000 flat. If there is a general downturn in property or a general bull market in property then it should probably be reflected in the REIT shares too

While I agree I am unlikely to last 90 years (but who knows I am in my early 30s and genetic engineering is just starting so maybe we will have multi hundred year lifespans by the time I am a pensioner) I think that is less of an issue as I could gift the shares/property on my death or sooner and the receiver continue with the option to keep shares and let the lease expire


Mathematically it seems to be best to not extend the lease but the old gut feeling says otherwise

Thrugelmir

GreatApe wrote: »

Right now you can get 5% in the same sector, for instance with British land shares which yield 5% and the value of their properties should go up with inflation

Why should they?

Share price was 1275p in 2007. Around 618p at close today.

Dividend growth in recent years is at best in line with CPI.

Currently out of 7 major broking firms. 6 rate BL as a hold, 1 as a sell. Nothing to suggest that the share price has the ability to rise 7-9% this year.