What is a freehold property? Pros and cons

Freehold property is the most common ownership type of property in New Zealand.

In a nutshell it means you own the property and the land it’s built on, for ever. It’s yours.

But just because it's the most common, is it the best type of land for property investors?

In this article you’ll learn what a freehold property is, and what the pros and cons are for owning a freehold property in NZ.

What is freehold property?

First things first, a freehold property – also known as fee simple – is a type of ownership and it’s about the land.

With a freehold property you own the land yourself, it’s very simple and it’s very common and is arguably the most desirable.

The owner of a freehold property owns the building and the land it stands on.

The word “freehold” comes from the fact that it is “free from hold” of any person or entity other than the owner.

This means, unlike other types of ownership, the owner of freehold land owns it outright. There are no additional ground rents, like you have with say a leasehold or a unit title (more on this below).

There is also no limit on the amount of time you are able to own the property and land. For comparison, with leasehold there is generally a 99-year lease.

In addition, because the owner owns the land outright they are able to do pretty much (there are some exceptions) whatever they want with it. Although you, of course, still have to comply with all laws e.g. the Resource Management Act.

Compare this to say a cross lease, where your neighbours have to be consulted over many of the decisions you make on your side of the fence.

The sale of a freehold property requires a lot less paper work. But, buying a freehold house is also substantially more expensive than say a leasehold property (at least in the short term).

What are the other types of ownership in New Zealand?

There are four main types of property ownership in NZ: freehold, leasehold, unit title and cross lease.

You already know about freehold properties … so what’s the difference between the other 3 ownership types?

Leasehold

With leasehold you own the buildings, but not the land beneath them. (Someone else owns the land).

Essentially, you pay rent – called ground rent – to use the land your property is built on.

When you buy a leasehold property you also buy the right to use the land for a set amount of time (this is all written in the contract with the person who owns the land).

Any leasehold property you buy does have a “lease” attached, and the terms will set:

• The amount of ground rent you have to pay

• How often the ground rent is reviewed (e.g. every 7 years)

• How long the lease is, and what happens at the end (e.g. can you renew, or does the owner get the land back?)

Cross lease

A cross lease is one of the formal structures of land ownership in New Zealand.

This is where you and your neighbour jointly own the land underneath your two houses. You then lease the ground from each other. That’s why it’s called a cross lease.

This arrangement lasts (usually) for 999 years.

For example, let’s say there are two flats next to each other and they are on a cross lease. You decide to buy one of the flats. If you do that, you will:

• Jointly own all of the land with the other owner

• Own all of the buildings on your exclusive part of the land (i.e. your house)

• Have a long-term lease for the part of the land that you exclusively use.

Unit title

This is where you jointly own land, along with a whole load of people.

For instance, this is common when you buy an apartment. You own the interior of your apartment, and then you jointly own the exterior of the building and all of the land with the other owners.

The moment you sign up to be a unit title owner you are automatically enrolled in that building’s body corporate.

And if you are a member of a body corporate all the land underneath the building is collectively owned by all purchasers.

So, if there are 10 apartments in a block, you co-own all of the land beneath with the 9 other owners.

Generally speaking, body corporates are more expensive but fees vary greatly.

Rather than a one-off levy, unit owners pay different amounts depending on the size of the apartment, car parks, and the sorts of amenities within the building.

What are the pros and cons of freehold property?

Pro #1 – You own the property and the land outright

Without sounding too obvious – you own the property.

You don’t have to pay any additional money once you’ve purchased the property.

So, there’s no need to worry about ground rents (like with leasehold), or body corporate fees (unit titles).

Pro #2 – Easy to sell and own

As the preferred choice of ownership (for most) it’s easy to sell and own freehold property.

It’s going to increase in value more quickly than a leasehold property.

And banks are often willing to lend against freehold properties, whereas they might take a closer look at properties that have other types of land ownership.

Con #1 – It’s more expensive

Because freehold is attractive, you’re going to pay more for it. Put simply, freehold properties are more expensive.

Mistakes people make with freehold properties

Some people think “I own the land for my freehold property … so I can do whatever I want with it … right?” Not necessarily.

A freehold property isn’t always unrestricted.

For example, there can be an “easement” registered against a freehold property.

That means there is a legal rule registered against your property.

Let’s give an example to make this really clear. There could be an “easement” on your freehold property that means you have to give your neighbour access to a common driveway.

Let’s say Bobbi Brown owns a freehold house and the driveway is shared with the house behind her.

The easement might say she has to give her neighbour access to their property. Even though she owns the driveway, she can’t build on it, or block it.

She might also need to give access to power companies wanting to connect electricity to the house behind her.

Other similar examples of freehold restrictions are certain covenants limiting what type of property you can build on your land as well as restrictions under certain acts, such as the Resource Management Act 1991.

There’s a lot of legal jargon in there. But, the key message is … you can’t do whatever you want to your land just because you own it. It’s not like you can just knock up a 7-story apartment building without telling anyone.

How do you find out if a property is freehold?

There are a couple of ways to find out if a property is freehold.

#1 – Trade Me

If you are looking to purchase a property, most of the time the Trade Me listing will tell you whether your property is freehold (or another type of ownership).

The real estate agent will typically write this into the description, although this may not always be the case.

#2 – OneRoof

But if the real estate agent hasn’t done this (or you’re looking to find out the land ownership of a property that is not for sale), head to OneRoof.co.nz.

Click the “estimate” button, type in your property address, then press search.

Scroll down to the Property Data section and you will see “type of title”.

This way you can find out if a property is freehold, even if it isn’t listed for sale.

As an investor … is a freehold property the most desirable?

No, not necessarily. Just because it is the most common type of ownership in New Zealand doesn’t mean you should focus your efforts solely on this type of property ownership.

For instance, while there can be a bit of a stigma with cross leases, not all cross leases end in disaster.

Some people live very happily in their cross leases, despite the fact there is a portion of the market who will not buy a cross lease.

A unit title is another common type of ownership among investors, particular for high yielding apartments, such as dual keys.