Should You Buy A Leasehold Property?

Alex from Augusta GA asks:

I’m a single minimalist whose not opposed to a small but pleasant living space. I have a healthy savings and sufficient salary job lined up the end of summer (2021). I know I’ll want/need to buy a property sooner than later (as rates aren’t expected to go down anytime soon). I’ve found attractively priced (could purchase without mortgage) LH studio condos with seven years on lease.
Question: Should I consider purchasing before even arriving, assuming the property meets my needs/budget and I find a trust worthy agent (recommendations welcomed ;) ?

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Show Transcript:

o alex
alex says i’m a single minimalist not
opposed to a small but pleasant living
space
i have a healthy savings and sufficient
salary job lined up in the end of summer
i know i’ll want or need to buy a
property sooner rather than later i
found attractively priced
leasehold studio condos with seven years
on the lease i think that’s that’s the
key word seven years unless question
should i consider purchasing before even
arriving assuming the property meets my
needs and budget and find a trustworthy
agent well we know who the trustworthy
agents are that’s that’s that’s the easy
part of the question so
let’s let’s take alex’s let’s take
alex’s question over here and kind of
expand this into a discussion about
leasehold properties so here’s alex
he’s thinking about buying a leasehold
first of all a quick definition
leasehold as the word says is lease you
are leasing the property you don’t own
it i a um
bring it up this way a leasehold
property is the word says you lease the
property just like you lease a car that
means there’s a term and when the term
is up the property goes back to the
landowner unless there’s a renegotiation
an extension of the lease so it’s not at
all like a traditional buying and
because of that the prices will
fluctuate now alex says he’s got seven
years on the lease that means after that
pr after seven years if there’s not a
renegotiation of that lease agreement
the property goes back to the landowner
typically there will be a renegotiation
but you don’t know what the new lease
amount which is a monthly rent like a
month there’s a monthly rent uh per se
it’s uh not a ransom lease but there’s a
monthly lease amount that you have to
pay for that property so real quick a
primer on that uh but you know leasehold
is this going to come back i mean what’s
scott what’s what’s your advice and
scott saying no what’s your what’s your
advice for at least hold uh hit this
first one first for alex seven years on
the lease should he go for it number one
and number two what do you think about
leasehold uh potentially coming back as
this market continues to kind of
skyrocket
yeah i don’t think we’ll see leasehold
coming back and and it’s because the
unintended consequences that that came
down you got to look at the history of
what leasehold why it was created it was
created for affordability right which is
the point you’re kind of talking about
peter is will it come back because we’re
we’re getting into prices where people
deem it is unaffordable right and you’re
trying to make housing affordable for
locals the problem is is they were set
on like 99 year leases and everyone goes
ah we’re not gonna have to deal with the
problem for a long time
down the road and and less than one
percent of properties on oahu or at
least hold
um so there’s it’s not many but
when when you have these buildings that
are coming due like this and you have
400 units and you know 400 people in
these units uh the the city does not
want to
evict these people because that’s what’s
what could happen if the landowner says
i want the units back they can take them
back fix them up do whatever they want
resell them rent them release them
however they want to deal with it and
that’s just a nightmare in fact back in
2005 i think it was or 2000 or early
2000s the city council passed a bill
trying to force landowners to sell the
fee they went to court they found it
unconstitutional and then what they did
that this the state gave significant
incentives
in fact no capital gains tax if the
landowner sold sold the land to the um
the condo owners effectively making it
fee simple at that point so
i don’t think they want to get back into
that i you know there’s some that are
left and i think
they’ll stick around for a little while
until somebody eventually sells the land
but it’s not there’s the unintended
consequences down the road are
too big of a headache to to his answer
what he was um you know asking the
question is it’s obviously not the same
kind of asset or the same kind of give
you the same kind of financial stability
are you you know what is that cost
benefit analysis to you you have a risk
that in seven years you may be walking
away from the money you’re plopping down
on that if it’s cheap enough and it’s
going to be less than what rent is going
to be and you don’t care that you’re
going to walk away in seven years fine
buy it
that’s a decision you got to make in
your head i
the this unit the first unit i ever
bought was leasehold
but the landowner had died and there
were three owners and and i ran the
numbers and i’m like
these guys aren’t going to want to keep
the land they’re going to want the cash
and get out i took a risk on that the
renegotiation fee was coming up and they
ended up selling it so
you know and i had a discount on it
because of that now that’s you got to be
really careful it’s just a more risky
purchase and you have to analyze whether
or not
the money that you’re putting in
is it okay if you have to walk away from
it uh san souci down on the beach has
two years left on the lease you can buy
a studio unit right on the beach for 200
to 250 000 and you may be walking away
from that money in two years is that
worth it to you
that’s a that’s a that’s a great point
i’m gonna come come back to uh i’m gonna
come back to you later scott with uh
with a question about uh the currently
will the current lease hold market
prices rise but let’s talk about that
later because i want to get to heidi
heidi what’s your sense uh what would
you tell uh first of all what would you
tell alex here alex who’s asking about
this leasehold condo sight unseen by the
way uh seven years on the lease you know
buy before i write let’s kind of hit
that one and then what’s your sense of
what’s going to happen where do you see
the leasehold market going on maui
well i mean leasehold and sight unseen
are are kind of two different things to
talk about um
but i’ll talk about the leasehold market
first um
you know is leasehold coming back it’s
not coming back in the sense there’s
gonna be more inventory of leasehold
however
so every year that goes by in a
leasehold you have a year less less on
the lease
so logically you think well it’s going
to go down in value every single year
well that’s not how the leasehold market
works at all um
leasehold markets appreciated
significantly
over the past few years and the reason
is
people
look at leasehold and compare it to what
else they could buy that’s to be simple
um so
i mean i’ve sold leasehold and they’ve
doubled in value
um and it just depends on
on where the market is at that time and
i’m noticing because we’re in a a super
strong market right now is
leasehold properties that probably would
have been sitting on the market
in a in past years are selling quicker
because we just have less inventory in
general and the prices i mean three four
hundred thousand to get something
beachfront is just way more affordable
and attractive to somebody
versus spending a million dollars so
i mean the leasehold market is i don’t
know kind of coming back
um and then i don’t know do you want to
talk about the sign on scene sure sure
yeah hit the sign and see when
um
my recommendation to buyers is if you
can i mean i always if you can make it
over to maui
um
you should try to come over and see the
property you’re buying
if you’ve been to the area many times if
you know the neighborhood if you know
the condo complex
you can probably do things virtually i
mean
i do a lot of face time tours with
buyers and we have a lot of technology
to look at everything
but i think especially
if you haven’t been to the area been to
the neighborhood
it’s worth getting on a plane and coming
over
because it’s it’s a big investment
in real estate so i mean
totally
up to you as the buyer how much risk
you’re willing to take but um i mean
even with all the video tours and 3d
tours and everything i mean there’s
nothing like seeing a property in person
yeah you know i couldn’t agree more on
that i mean
like you said i think the qualifier
would be if if for example you had
you had gone to a resort a destination a
given a property and you go there let’s
say every year and you know it like the
back of your hand and a unit in that
building goes for sale yeah maybe you
can get that one unseen but other than
that
you know it’s like the difference as you
were saying this heidi you’re you’re so
right about it you know you could do all
the videos and photos that you want but
it’s sort of like the difference between
looking at a map of a trail
right versus being on the trail right um
you know there there’s there’s a
difference there’s a difference of
looking at the map and being actually on
the trail itself um scott what that’s uh
heidi touched on what i what i kind of
wanted to come back to you on which is
uh yes uh leasehold’s never going to
quote come back as a as a and and highly
well expressed as an increased inventory
there will be more there won’t be more
properties coming on the market for
leasehold but what do you think is going
to happen to the existing properties
unless we’ll have you been seeing the
price movement are they also going up
although maybe not as much are they also
going up as well what’s what’s what do
you see happening as far as that goes on
leasehold
yeah i mean the the pro obviously
whenever you’re analyzing the market in
general looking at what you’re gonna do
if fee simple prices have gone up
considerably then you’re gonna and
you’re looking considering leasehold
you’re gonna compare that right you’re
gonna see okay well wow that’s way up
here now look how affordable i can get
this
and but you have to analyze every
leasehold property in and of itself
because every single leasehold property
let’s say a condo building for for
example you got two different kind of
buildings they’re both leasehold one
could be 30 000 for a one bedroom unit
the other one could be 500 000 for that
leasehold unit why because the lease on
the other one in the lease terms are
significantly better on the other one
and longer and further out the one on
the 30 30 35 000 one is up in three
years
no leases are the same every single one
of them is different there’s periodic
step ups there’s renegotiation periods
and then there’s the end of the lease
term and they can all be
none of them are the same so
you really got to analyze
property by property and and then
analyze it to what your
what your options are out there and and
then you make the decision so naturally
with the market going up like this yeah
it increases the leasehold component um
it doesn’t it will never get to the
speed that we’re we’re dealing with fee
simple properties because of that
leasehold element because of the fear of
the unknown of okay what happens at this
trigger point what happens when the
lease expires what happens when there’s
a renegotiation you don’t know so there
there’s always a longer lag time days on
market and things with leasehold yeah i
mean there’s no question fee simple is
the way to go and that’s what that’s not
by by by far a couple of questions have
popped in uh tom kerr who tom is a tom
joined our fall 2021 islander ohana so
tom looking forward to working with you
tom says i don’t intend to buy a
leasehold condo but i’ve been watching
leasehold condos in poipu in kauai some
20-plus units in one complex because i
learned the monthly lease fee rent is up
in 2022 as a result i’ve seen some
healthy price drops yeah tommy exactly i
mean you’ve you think about it right so
the the lease fee is going to be the
least rent’s going to be up now i know
if it’s been negotiated yet what it’s
going to be in 2022 they may or may not
have negotiated i’m going to guess that
the reason why you’ve seen those price
drops is because one of two things
either either they know what the rent is
going to be in 2022 and it’s
substantially higher so scott liked your
point earlier it’s this cash flow thing
it’s almost like the interest rates
going up the price has essentially those
those lease rents going up tom have
increased the price of the condo and
because if it’s it’s increased the price
of the condo the quote selling price the
lease price has gone down so that’s kind
of what you’re seeing some uh most
likely what what’s going on because of
that um
here’s one from
dwayne i say you have seven years left
on the leasehold couldn’t you ask that
there you go that’s what scott says yes
scott says no it’s going to cut me off
couldn’t you ask to do a subcontract
thanks scott couldn’t you ask to do a
subcontract to guarantee a renegotia on
that seventh year scott you want to you
want to expand on that a little bit
yeah i mean essentially what happens the
the association so all the unit owners
are part of association
and the association board will typically
hire an attorney there’s a couple
attorneys that specialize in this and
they’ll engage the landowner with
negotiations for an extended contract
an extended lease or renegotiation
whatever it is in um in bulk
um and sometimes the landowner will make
the fee available and usually when they
make the fee available it’s in bulk so
75 percent of the owners agree to buy
and 25 don’t the association will try to
buy that
that 25 out so then the association
becomes the the fee owner and the unit
owners pay the association the lease
rent from there they’re going forward
that’s a good scenario where i’ve seen
it transition but yeah the association
negotiates in bulk the landowner does
not want to deal with individual owners
he’s going to say take a hike move on
that gets way too complicated it gets
yeah it’s it’s one big it’s one big huge
contract um uh quick uh tom says uh also
aren’t many uh leasehold condos
purchased by investors as vrbos versus a
full-time wrestling could be it all
depends on on the math uh tom you know
it’s still uh
the you know the numbers are the numbers
there’s the price that you pay to get
the fee and then there’s the monthly
price that you have to pay as far as the
lease rent can you make that bet you
know and then there’s maintenance fees
et cetera can you make that balance out
is the market willing to kind of have a
renters pay more can you make out some
some do and some don’t and i would think
in that case uh as an investor you’re
going to care less about the lease
expiring because you don’t care the only
question is that you can could get get
back a good return on your investment uh
gene gene reynolds says uh fee simple is
the only way to go i’ve been in a
leasehold and was happy to sell it scott
i got my booster vaccine at capilani
hospital so there there must be some
inside game there between you and the
engine about the booster shots i told
her leasehold unit for her many many
years ago one of my favorite people
hygiene awesome and uh helped them with
the other side awesome
yeah so um and and look look and you
know scott you know we’ve talked about
this before you know you your first
property was these whole my first
property was leasehold and and i mean i
bought it because it was a bunch of
things it was affordable i i believe i
had
this was a long time ago but i had
something like 30 or 40 or 30 years left
on the lease so there was no way i was
gonna you know worry about it and i only
held the property for four maybe three
years maybe four years i don’t know how
long it was and i sold it and
uh you know right timing got lucky blah
blah blah you know doubled my doubled my
money on it you know it was amazing
there’s nothing wrong with leasehold
it’s being informed with what the
decision that you’re making
that’s it there’s don’t you don’t need
to shy away from it necessarily if it
fits and you’re educated on it it might
be a good good way to go yeah just and
like you said i think that’s that’s well
put you know know what you’re getting
involved with know what you’re getting
involved with uh just a funny a funny
side note uh some of you may remember
this i mentioned before that that first
lethal this is so funny that first
leasehold condo i bought
it was a one-bedroom unit 64 000 that’s
what i paid for that 64 000 for that for
the one bedroom so think about that one
folks okay