Thoughts on leasehold units?

Question

Hi All,

Curious to get everyone's thoughts here on buying leasehold properties from an investment standpoint. I'm looking to purchase a condo in the $400-$800k range, and plan on making it a STR. Undecided if I will self-manage or hire a property manager.

I've been excluding all lease-hold condos from my search, but on second thought, maybe it makes sense? I know the property will appreciate far less, but the reduced price would significantly increase my cash flow.

Thoughts?

Kevin Ing · Answer

Agreed. I was speaking in terms of a real estate investment.

It can also work for elderly people who more than likely will not live beyond the end of the lease period. It can allow them to live in a nicer property than if they were to purely rent or buy fee simple.

Kevin Ing · Answer

@Zander Kempf  Thanks for confirming my fears about leasehold.

In most situations it's a depreciating asset for the owner of the structure, making it the opposite of an appreciated real estate investment. Best to avoid 99% of the time.

Zander Kempf · Answer

@Kevin Ing You pretty much covered it. The lessor has a much more advantageous position. I've seen an owner do a 500% increase on lease rent, and the lessee had no choice other than to accept it or walk away and give up the buildings they had built.

Kevin Ing · Answer

Question to all: What are the possible scenarios at the end of a lease?

A) Renegotiate to extend the lease and settle on a new monthly lease fee, whatever that may be (lessee has almost no bargaining power?)

B) New lease cannot be agreed upon and you walk away from the property -- forfeiting all the improvements which become property of the lessor?

C) Renewal is not offered and you lose the property -- perhaps the building is to be demolished, etc.

Any other scenarios?

Kelly Alliger · Answer

That is an interesting reply.  I am considering a leasehold unit on Oahu.  10 years left, cash purchase, not to be rented out, just for our family to use as a vacation home.  The lease is up for renovation in 5 years.  Is there a rule on how much it can increase by?  If it's $500/mo now can it double?  That's the only thing I'm concerned with.

Elijah F. · Answer

Looks like the monthly maintenance fee for that unit is $1,169 and monthly lease rent is $925. So monthly, you would pay $2,094 for this unit before any other expenses. Also, you can't (or it is REALLY difficult to) finance this unit.

Joel Bongco · Answer

@Rachel De Villava.  Leasehold properties are pretty tricky and doing your homework and  your due diligence is a must.  In my case, here are the details:

• Location: Waikiki, Hawaii
• Unit: 1 Bedroom/1Bath
• Lease Term: 30 years 
• Lease Rent: $540/mo
• Maintenance: $450/mo
• Purchased: $45,000
• Rehab: $18,000
• Holding: $4K
• Sold: $128K
• Profit: ~$60K+

In my opinion, risk was low, the margin was pretty good, with  minimal costs from a Hawaii perspective (everything is expensive here!!).  I'm still not big fan of leasehold properties due all kinds of risk variables.   I would advise to stick with fee simple properties unless the numbers look super good.  IMHO, some Leasehold properties here in Hawaii are traps...Please PM me if you want to talk via phone.   HTHS!  Aloha,  Joel

Carlos Ptriawan · Answer

The other problem with FS vs leasehold is, at least not in South Oahu, the price between FS and leasehold is not that much different, only a few hundred PSF differences ( in terms of dollar, only $150k differences). I'm wondering who in the world would like to buy leasehold especially if they don't live there, it's not attractive unless you know something that we don't.@Kevin Ing is right. Most I knows that's buying leaseholds are 70 y.o. retirees. Lot of bay area seniors did that.

Daniel A Lee Kim · Answer

Congrats @Joel Bongco on that successful flip!  I’m a realtor but also an investor and there are other things to consider when doing a flip like this as well such as:

-Not only the length of the lease term but laso the years remaining and who the owner is.

-Location is key, with a lease hold like this, you are targeting buyers that want to buy cheap but yet get to enjoy the “vacation” lifestyle, while making a few bucks here and there.  There isn’t a huge pool of leasehold buyers.

-Unless it is cash, lending can be very complicated.

Lease hold can be a great way to flip, but I normally stay away from it as an investor unless there is a way to make the money back AND more before the lease is up (worst case scenario).

@Kelly Alliger That is up to negotiation and current market.  When they renegotiate the lease terms they will base it off of current market so it could stay at 500 or it could increase.  Most likely it will increase like how rent tend to increase.

Carlos Ptriawan · Answer

Leasehold may work in very specific circumstances:- For sure, you muat have the cash to close. Impossible to ask for financing, we know why.- If you live there and rent out the room, it makes sense, especially if you're retirees- If your children also have a school there and willing to rent out the room.- There's still quite a good time till the expirationYou may hit jackpot if the building owner decides to sell the leasehold and transfer it to FS :) LOL

Thoughts on leasehold units?

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