Difference between freehold and leasehold

[yuli2513]

Hi,

I am reading the texts on page 15 of Chapter 9, and the following texts got me a bit confused:

"Compared with freehold investment, a leasehold interest is of a fixed term and provides a higher initial rental yield and a capital loss if the lease is held to the termination date. "

And later on there is explanation given on the capital loss part:

"A capital loss occurs if the lease is held to the termination date as the lease has no value at this point because the leaseholder has no interest left in the property."

I find this a bit difficult to understand, and I have the following questions:

• Why does leasehold come with higher initial rental yield (is this by convention)?
• And why is there this capital loss (I find it natural that the lease will bear no value if held to termination, but I fail to understand why this would lead to a capital loss, as I find it natural that after the lease period is over, there is no value left)

Thanks a lot for looking into this.

 

[mugono]

Hi,

I am reading the texts on page 15 of Chapter 9, and the following texts got me a bit confused:

"Compared with freehold investment, a leasehold interest is of a fixed term and provides a higher initial rental yield and a capital loss if the lease is held to the termination date. "

And later on there is explanation given on the capital loss part:

"A capital loss occurs if the lease is held to the termination date as the lease has no value at this point because the leaseholder has no interest left in the property."

I find this a bit difficult to understand, and I have the following questions:

• Why does leasehold come with higher initial rental yield (is this by convention)?
• And why is there this capital loss (I find it natural that the lease will bear no value if held to termination, but I fail to understand why this would lead to a capital loss, as I find it natural that after the lease period is over, there is no value left)

Thanks a lot for looking into this.

Hello,

The higher initial yield on the lease would be needed to reflect the complete loss on your investment (and the right to collect the rental cash flows) once the lease comes to an end.

This doesn’t occur with a freehold interest in a property, where the owner could rent out the property into perpetuity.

Does that help?

 

[yuli2513]

Hello,

The higher initial yield on the lease would be needed to reflect the complete loss on your investment (and the right to collect the rental cash flows) once the lease comes to an end.

This doesn’t occur with a freehold interest in a property, where the owner could rent out the property into perpetuity.

Does that help?

Hi,

Thanks a lot for looking into this. I am still struggling to understand one point: why is there loss related to a leasehold? if there is always this loss related to a leasehold, it seems to be a wrong investment to enter into from the first place.

 

[mugono]

Hi,

Thanks a lot for looking into this. I am still struggling to understand one point: why is there loss related to a leasehold? if there is always this loss related to a leasehold, it seems to be a wrong investment to enter into from the first place.

The total return on an investment = income yield plus capital growth.

It’s the total return that ultimately matters.