Leasehold vs Fee Simple
You are buying a home here in Kona Hawaii, should I go leasehold vs fee simple? That is a great question that I will answer for you.
So today we are going to over the difference between Leasehold and Fee Simple property ownership. My buyers keep reaching out to me from time to time saying they found a great property on Zillow or my website and they want to jump on it and submit and offer.
Well hit the brakes my friend, there is a reason why you are finding really cheap properties for sale in Kona, that reason is the property is a Leasehold property not a Fee Simple Today I am going to go over the differences and address the pros and cons of each property and reason why you might choose one over the other.
So, let’s look at each one as an individually, Fee Simple this is what 95% of people run across on the mainland are when buying a real estate. That is not true here in Hawaii, where we have a sizeable amount of both Fee Simple and Leasehold properties and you will find condos for sale in Kona around the $125 to $175K range and even single family homes for sale in the 350K to 450K range.
The difference here is with Fee Simple properties you own the property outright, you own the structure and the land beneath it, but with leasehold, you only own the structure not the land that it sits on and that is where the price changes occur. You are basically renting or leasing the land for a fixed period of time
When you run across properties priced very low, you are going to want to look at the land tenure first When you find a leasehold, they will have an expiration date to the lease and a potential renegotiation date
The question is can I sell the property anytime along the way while I have ownership and the answer is yes, but the lesser amount of time remaining on the lease, the lower the value of the property and the more difficult it is to sell.
If the remaining portion of the lease is long, say 20 or 30 plus years, leasehold properties could be a good investment for rental income on short term vacation rental basis if it cash flows out, but it this case since there is on 12 years remaining on the lease, I advised my clients it was not a good idea.
So this is the tricky part of leasehold ownership. I get asked from time to time can I buy the land under the property that is leasehold, well depending upon the landowner that could be possible, but in most cases that does not appear an option at least from my experience.
Getting financing for leasehold properties is difficult. Most lenders will not consider these types of properties unless the remaining lease portion exceed 30 plus years on a traditional 30 year mortgage.
Another disadvantage of a leasehold property you cannot facilitate a 1031 deferred tax exchange for these types purchases.
The pros on purchasing a leasehold are: much lower price point, lower tax payments, home ownership at a much lower price versus continuing to rent.
Hope you like the information on leasehold versus fee simple properties here in Kona.
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Posted by Stephen Proski on