This week's episode of Good Landlording discusses one of the first questions that landlords ask themselves when they're looking for a buy to let: should they buy a flat or a house?

Richard and Suzanne go through the pros and cons of both flats and houses, drawing on their own experiences as landlords, with Suzanne only now investing in houses, and Richard having only ever bought flats as rental investments. 

Suzanne explains the difference between "leasehold" and "freehold", service charge, ground rent, and practicalities, before going through what the new Leasehold and Freehold Reform Act 2024 promises to bring now it is on the statute book.

What we cover in this episodeWhat's the difference between leasehold and freehold?Ground rent and when it becomes a problemWhat does it mean when a flat owner has a share of the freehold?Service charge - top tips for leaseholdersThe advantages of flats as investments for landlordsThe downsides of flats as investments for landlords?The advantages of freehold houses as investments for landlordsWhat makes a good house for landlords?What makes a good flat for landlords to let?Golden nuggetCredits

What's the difference between leasehold and freehold?

For leasehold properties such as flats and some houses, the building itself  and/or the land it sits on are owned by someone else called the "freeholder". The freeholder may be the original developer,  or, they might have sold it onto another company.

Each leaseholder enters into a lease with the freeholder to own the flat or leasehold house for a fixed period of time.  And so this is currently typically 99 years or 125 years for residential properties.  The length of the lease decreases each year until it eventually runs out, unless the parties agree to extend the lease.  A lease is therfore an asset that will that goes down in value the closer it gets to the end of the term. 

When someone buys a flat, the leaseholder transfers the lease agreement to the new owner. This is called "assignment", and the freeholder is likely to need to give consent to the assignment.  And during the the lease agreement, the term of the lease, the leaseholder pays ground rent  and a service charge to pay for repairs and maintenance. 

A leaseholder is a long-term tenant, and a freeholder is a type of landlord. However, to avoid confusion, it is good practice to use the word "leaseholder" to refer to somebody who holds a long term lease, and keep the word "tenant" for someone who has a a tenancy agreement with a landlord.

When someone buys a lease, they pay a "premium" for the lease, which is an upfront payment for the right to occupy the property for the term of the lease.

Ground rent and when it becomes a problem

Leaseholders also pay ground rent, which may be a "peppercorn" (a nominal amount which the freeholder does not collect), or a more substantial sum. Over the last few decades, some developers and freeholders have seen ground rent as a profit centre, and have included onerous ground rent clauses into their leases, which increase over time. Sometimes ground rent doubles every 10, 15, 20 or 25 years.

Onerous ground rent provisions are a big problem as many mortgage companies refuse to lend money on properties which have them. Ground rent above a peppercorn was abolished for new leases a few years ago, and it was supposed to be restricted in the Leasehold and Freehold Reform Act, but it got dropped at the last moment, when the election was called. 

>> Blog post: The Independent Landlord - The latest news on the reform of ground rent

What does it mean when a flat owner has a share of the freehold?

Sometimes the owners of flats in a building (who are leaseholders) club together and set up a company to buy the freehold, which the flat owners have shares in. These leaseholders are said to have a "share of the freehold" in addition to their lease.

However, do be careful,