You probably understand the difference between renting a property and owning a home, but did you know that there’s also a third category known as a leasehold property? A leasehold is a property that you lease — but for much longer than a tenant’s usual time frame. In fact, a leasehold contract lasts for a minimum of 40 years, but can last up to 999! So what’s the purpose of a leasehold property, and what do you need to know about owning one?
If you’re wondering what the advantages of a leasehold property are, keep reading to learn more about this unusual property type.
What Is a Leasehold Property?
In a leasehold arrangement, the property owner gives the leaseholder the right to live on the property for a specified time. As part of the agreement, the lessee has to make a down payment on the home. Typically this downpayment is much less than the 20% required for a conventional home. In addition, the leaseholder pays rent every month, as a typical tenant would.
Residential properties with leaseholds are relatively rare; however, this type of property can still be found throughout the United States, particularly in Florida, New York, and Hawaii.
Leaseholds tend to used where land is limited and at a premium, such as islands or beach communities. For instance, in Maui, many leasehold estates were created in the 1970s and 1980s for condo developments.
What Are The Advantages Of A Leasehold Property?
When you enter a leasehold agreement, you negate the need to purchase the land your home is on. By eliminating the cost of land, you can drastically reduce your overall and upfront costs. Another advantage of a leasehold property is that you have the option to purchase your freehold if your landlord decides to sell. In fact, when your landlord makes the decision to sell, they must offer you “first refusal.”
Since leaseholders rent their property for an extended period, they are able to improve or decorate their homes; however, they want to — this includes building additions and even whole new buildings.
Leasehold interests can be an excellent option for seniors who have a fixed income. Unlike a short-term lease, where the rent can be increased each year, a leasehold interest allows you to enjoy rates that stay consistent — often for decades. Plus, leaseholds require a lower down payment than a freehold property. This means leasehold agreements are also a good option for retirees who are looking to downsize and save money.
What Are The Disadvantages Of A Leasehold Property?
When the lease comes to an end, the property is returned to the freeholder, even if you’ve satisfied your mortgage in full — this includes any improvements you’ve made to it. Put simply; your property is a dwindling asset.
Plus, if there’s only a short number of years left on the lease, your property value can be negatively affected. In fact, some lenders won’t approve mortgages on leasehold property that have a limited time left on the lease.
Extending a lease can be a complex and costly legal process, so it’s crucial to think carefully before you purchase leasehold property.
Buying a leasehold property is very different from purchasing a typical house. Although the upfront costs for leaseholds are typically lower than buying a conventional home, there are often extra costs that need to be factored into your budget.
Suppose you’re looking for a property contract that combines the affordability of a lease agreement with the longevity and stability of a mortgage. In that case, a leasehold property could be the ideal solution for you.
