Leasehold Condo

[Ally H.]

I'm AD military and stationed in Hawaii for at least the next 6 years. While I would like to buy-and-hold a SFH or multi-unit as my first entrance into RE, the competition in this market for them has been tough (I've met so many overseas investors at open houses!). As a result, I started expanding the search.

There are a few condos in Waikiki that are leasehold properties, so they are relatively inexpensive compared to fee simple condos. I am only looking at leases that expire in 2050 or later. I would be cash flow neutral if I lived in it and rent out part of it (and build up equity) or have a small positive cash flow if I rented out the entire unit. Depending on how the market goes and if I am able to find a property that's more in line with my desired buy-and-hold strategy, I would be open to selling it in 2-6 years and using those proceeds to fund the next purchase.

What do you all think? Should I analyze leasehold units differently than I would a fee simple unit, in terms of cash flow, etc.? The alternative is to rent while the search continues, but the market here is projected to continue to recover quickly. Thank you in advance!

[Dana R.]

Hi Ally,

I own a couple of condos in Waikiki so am familiar with the area and with properties that are leasehold and fee simple. 

Here a are a few things to watch out for with leaseholds:

Step-ups--Even if the lease doesn't expire until 2050, there are usually "step-ups" in the lease fee. For instance, perhaps the lease fee is set at $350/month until 2017 at which time the lease fee will go up. How much? Who knows. So, that's a risk. Owners of leasehold properties don't know what the lease fee will be when it's renegotiated. And remember, the lease fee is on top of the HOA dues.

Property value goes down, not up, each year--Leaseholds decrease in value each year since when the lease expires, the property has 0 value.

When you sell leaseholds--If the new buyer wants a 30 year mortgage and there's not 30 years left on the lease, then s/he won't be able to get a traditional 30 year mortgage.

On the upside to leaseholds, you can enter the HI real estate market at a lower price point. And then if the fee becomes available, you can purchase it to make your property fee simple.

Best of luck!