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Freehold and leasehold - the difference
04 May 2018 (199 views)

Many people think that a leasehold property will have no value when the lease runs out and a freehold property will have a value forever. They are willing to pay much more for a freehold property, compared to a leasehold property. 

Are they making the right decision?

According to this table, the difference between a freehold property and a 99 year leasehold property is 4%. If you pay $2 million for a 99 year leasehold property, you should only pay $80,000 more for a freehold property. 

The table is provided by the Singapore Land Authority. They use this table to calculate the value of leases and freehold land. They know what they are talking about. 

INVEST FOR 99 YEARS
Most people do not believe the difference could be so small. But it is the correct figure. Do you know how much the $80,000 would accumulate to at the end of 99 years at the rate of 4% p.a.?

It will be $3.8 million. That will be the value of the freehold land at the end of the lease. 

Suppose you paid $400,000 more for the freehold property, thinking that it is worth 20% more than a 99 year lease property. 

This sum of $400,000 would accumulate to $19.4 million at the end of 99 years. Are you sure that the land will be worth so much. But if you invest $400,000 in shares to earn 4% p.a., you will get $19.4 million.

CONSUMPTION OF PROPERTY
It is a fact that if you invest $2 million in a 99 year property, you will consume the invested sum over 99 years. The value of the lease will be $0 at the end of the lease.

If you bought a freehold property, you are also consuming $2 million over the same 99 years. The only investment is the additional 4% of the purchase price that you paid for the freehold. 

At the end of 99 years, the building is probably too old and has to be torn down. It has no value. Your only value is the additional 4% that is invested for 99 years to get $3.8 million. You could have invested this sum in shares to earn the same return.

 


 


Freehold and leasehold - the difference
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Many people think that a leasehold property will have no value when the lease runs out and a freehold property will have a value forever. They are willing to pay much more for a freehold property, compared to a leasehold property. 

Are they making the right decision?

According to this table, the difference between a freehold property and a 99 year leasehold property is 4%. If you pay $2 million for a 99 year leasehold property, you should only pay $80,000 more for a freehold property. 

The table is provided by the Singapore Land Authority. They use this table to calculate the value of leases and freehold land. They know what they are talking about. 

INVEST FOR 99 YEARS
Most people do not believe the difference could be so small. But it is the correct figure. Do you know how much the $80,000 would accumulate to at the end of 99 years at the rate of 4% p.a.?

It will be $3.8 million. That will be the value of the freehold land at the end of the lease. 

Suppose you paid $400,000 more for the freehold property, thinking that it is worth 20% more than a 99 year lease property. 

This sum of $400,000 would accumulate to $19.4 million at the end of 99 years. Are you sure that the land will be worth so much. But if you invest $400,000 in shares to earn 4% p.a., you will get $19.4 million.

CONSUMPTION OF PROPERTY
It is a fact that if you invest $2 million in a 99 year property, you will consume the invested sum over 99 years. The value of the lease will be $0 at the end of the lease.

If you bought a freehold property, you are also consuming $2 million over the same 99 years. The only investment is the additional 4% of the purchase price that you paid for the freehold. 

At the end of 99 years, the building is probably too old and has to be torn down. It has no value. Your only value is the additional 4% that is invested for 99 years to get $3.8 million. You could have invested this sum in shares to earn the same return.