You’ve researched the location, you’ve run your numbers, and found the perfect development.
Then comes the sting in the tail…service charges.
Service charges are one of the most common objections we hear from investors.
But the blanket “avoid anything with a service charge” advice that some people are peddling could be costing you money. Because some of the best deals in the country right now have service charges attached to them.
Ultimately, service charges aren’t the problem. Bad ones are.
So how can you spot the difference?
What is a service charge?
A service charge is a fee that’s paid by leaseholders to cover the cost of maintaining and managing communal areas and services within a building. It can include things like cleaning shared spaces, paying for insurance, lift maintenance and repairs, grounds upkeep, and staff costs.
Depending on how the building is set up, service charges are paid to the landlord, freeholder, or a designated management company that’s tasked with overseeing the development.
Why do service charges have a bad reputation?
Enough people have had bad experiences to make everyone else nervous. They’re often opaque, they can rapidly escalate, and they’re tied to a system that gives the people paying them little to no control over them.
The lack of clarity is a concern. And because some unscrupulous operators have been known to inflate costs or mark up invoices to take advantage of kickbacks and commissions, there’s an understandable lack of trust out there.
None of this means that every service charge is a rip-off. Plenty of buildings are well managed, with transparent accounts and charges that reflect the cost of upkeep. But the horror stories are real, they’re common enough to have earned the system its reputation, and they’re the reason “what’s the service charge?” is one of the first questions every investor asks.
Fortunately, leasehold reform is on the way. The government has committed to changes that will drastically improve the current situation, delivering greater transparency and accountability, alongside new rights that make it easier to challenge them.
What rights do leaseholders have?
The system also feels stacked against owners. In most cases, you can’t choose your managing agent, and so it’s easy to assume that means they can name their price. But they can’t. Leaseholders actually have a fair few rights, it’s just that no one knows about them.
By law, service charges have to be reasonable. You have the right to ask for a summary of the costs and inspect the receipts behind them, you must be consulted before major works that would cost any leaseholder more than £250, and you can challenge a charge at the First-tier Tribunal. Few leaseholders know any of this, which makes it easier for a bad agent to get away with things.
Why are service charges increasing?
Service charges have risen sharply, surging by over 32% over a five-year period. That sounds shocking until you remember what they’re paying for.
Material costs and labour shortages have pushed prices up across the board - that means repairs, maintenance and improvements are going to cost more. Just as they would in a freehold property.
One of the other factors driving up service charges is energy. Household bills have increased, and that impacts leasehold just as much as it does freehold. The majority of service charges will include a proportion of the energy required to heat and light communal areas. Some include centralised services that heat and power every property in the development. Both will have gone up alongside bills across the country.
The post-Grenfell impact on insurance premiums has also pushed up service fees, particularly in high-rise developments and those with cladding issues.
What does a good service charge look like?
Not all service charges are created equal.
Most people look immediately at what they owe. But the figure on the bill won’t tell you much. What really matters is what’s behind that figure, and whether the building is being managed in a way that protects your investment.
A well-run property should include an itemised bill clearly breaking down all the costs you’d expect to be incurred when managing a development. But there are a few things you should look out for that help you to spot a good service charge.
A sinking fund
Also known as a reserve fund, this is a pot of money that’s been set aside for future works. Think roof repairs, window replacements - anything major. If the sinking fund is healthy, you probably aren’t going to receive any nasty surprises. But if it’s suspiciously low, you could end up facing an expensive bill when something goes wrong.
A solid history
While we’re on the subject of unexpected bills, you should always ask for the last three years of service charge accounts. It’s worth digging into them to see if you can spot any anomalies. Have costs been stable or rising? Are there any sudden increases that don't have an obvious cause? Make sure you give them the same amount of attention as you would any other aspect of your property purchase.
Who’s spending your service charges?
You should also look at who’s running the building. Is it a reputable agent or a company with no apparent track record? Also who the freeholder is. Is it a housing association, a well-known developer, or an offshore entity with a nebulous background?
What does a bad service charge look like?
Again, when it comes to spotting a bad service charge, you’ve got to look beyond the headline number.
Unexplained increases
The biggest red flag to look for is a service charge that keeps on rising with no accountability. If charges have doubled over the course of a few years and no one can explain why, that’s probably a deal you want to walk away from.
No sinking fund
The sinking fund is again a key indicator. If there isn't one, or if it’s depleted, that should set your alarm bells ringing.
Cladding
Other things to consider include unresolved cladding or building safety issues and insurance premiums that look wildly out of line with what you’d expect.
Expenses that don’t add up
You should also look for unexplained (or unexplainable) expenses. If there’s a line item that raises suspicion, query it.
Should a service charge put you off?
No.
Many investors dismiss leasehold properties entirely. But it’s worth remembering that freeholds aren’t free either. Maintenance, repairs, upkeep - they’re a fact of life, and landlords need to budget for them accordingly. Service charges can get a bad reputation simply because they’re more visible, but they often reflect the costs you’d expect to pay on an equivalent property.
A freehold house with a roof that needs replacing will cost you just as much as a leasehold flat where the same work is funded through the sinking fund. The difference is that with the flat, someone else is organising it, and ideally planning for it in advance. With the house, it’s on you - and if you haven’t been setting money aside, it’s going to be a nasty surprise.
If your response is a blanket “no” to any investment opportunity with a service charge, then you’re going to be missing out on some fantastic opportunities. But that doesn’t mean you should simply ignore their impact. Because a badly managed building doesn’t just cost you month to month. It can make a property harder to sell, remortgage and let at a decent rate.
Every building is different. A well-run block with a healthy sinking fund, a transparent managing agent, and stable charges is a perfectly sound investment. A poorly run one with escalating costs, unresolved safety issues, and an opaque freeholder is a liability - no matter how good the headline yield looks.
Our advice is to treat it with the same care, attention and curiosity you would any other aspect of your decision-making process.
How do you factor service charges into your figures?
This is the bit most investors go wrong.
They either ignore the service charges entirely when they’re calculating their yields, and get a nasty surprise when the bills start arriving. Or they see the service charge and walk away from the deal without checking to see if their numbers still work.
The right approach is to treat any service charge as a known cost and to build it (and any potential increases) into your calculations from the start.
Let’s compare two hypothetical properties.
Property A is a leasehold flat that costs £150,000, could rent for £750 a month (£9,000 a year), and has an annual service charge of £1,800.
Property B is a freehold terraced house, it would also cost £150,000, rent for £650 a month (£7,800 a year), and has no service charge.
At first glance, you might think the flat is more expensive to run. But let’s do the maths…
The gross yield on the flat is 6% (£9,000 ÷ £150,000). But we need to factor in the service charge. Take that off the rental income, and you’re left with a net yield of 4.8%.
At this point you’re probably thinking the house will be a clear winner.
The gross yield starts lower at 5.2% (£7,800 ÷ £150,000). But there’s no service charge to pay, so that 5.2% is yours to keep. Except it isn’t. You still need to maintain the property. A general rule of thumb is to budget 10-15% of your rental income to cover ongoing expenses. Let’s say you’re lucky and it costs you the lower end of that estimate - that’s £780, which brings your yield down to 4.68%.
| Property A: leasehold flat | Property B: freehold house | |
|---|---|---|
| Purchase price | £150,000 | £150,000 |
| Annual rent | £9,000 | £7,800 |
| Gross yield | 6% | 5.2% |
| Service charge / maintenance | £1,800 | £780 |
| Net yield | 4.8% | 4.68% |
Suddenly the flat, with its off-putting service charge, is on a par with the freehold house. Maybe even slightly ahead if your costs go up.
And that’s just counting the financial implications - there’s also a time consideration here. Because with the flat, someone else is managing the whole thing for you, but when it comes to the house, that’s on you.
Now the flat may still not be the right move. But the takeaway here is to remember that a service charge mostly replaces costs you’d pay anyway. The difference is that it has a name, and it comes in regular structured instalments - which arguably makes it easier to manage.
Judge the deal on what you’re left with after all your costs. Not whether there’s a service charge or not.
The agent’s view
Service charges are one of the most common reasons we see investors walk away from an otherwise strong opportunity, and in most cases that’s a mistake. A service charge isn’t money lost; it’s what pays for the building to be properly run, insured, cleaned, maintained and, in many modern developments, kitted out with the concierge, gyms, co-working spaces and secure parking that today’s tenants actively look for.
From a lettings perspective, well-managed, well-maintained buildings let faster, attract better-quality tenants who stay longer, and can support stronger rents. Fewer void periods and lower tenant turnover often do more for an investor’s return than the service charge takes away.
That said, a service charge should be understood, not ignored…Most importantly, build the service charge into your numbers from the start and judge the deal on its net yield rather than the headline gross figure. Viewed that way, a property with a service charge can easily outperform one without.
— Nathan Hemming, Director, Vision Properties
Checklist: What to do before buying a property with a service charge
- Request the last three years of service charge accounts.
- Check whether there’s a sinking fund and how much is in it.
- Find out who the freeholder and management company are and check their reputation.
- Look at whether the service charge has increased significantly year on year.
- Check whether the building has any outstanding building safety issues.
- Include the service charge in your yield and cashflow calculations from the start.
- Compare the total annual cost of ownership (including service charge) against a freehold equivalent.
