What Are The Pros And Cons Of Buying Hawaii Leasehold Property?

Shelley asked this question during the live show from our YouTube channel:

What are the advantages of buying a leasehold tenure?

This started a discussion between us.  Many people say that one should never consider buying a leasehold property and for some, this may be the best choice. However, for others, leasehold is a good idea. We cover some of the pro and con reasons here.

This short clip came from our Aloha Friday Hawaii Real Estate Show which goes live every other Friday on our Hawaii Real Estate YouTube channel or our Living in Hawaii Facebook page

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Show Transcript:

Here’s a this is a big story and we’ve
got some info on but uh shelley says
what are the advantages of buying a
leasehold tenure so what would be the
advantage and there’s a lot of leasehold
whether i i i don’t know about how many
leasehold problems there are on the big
island and dylan but i know there’s are
are there a bunch
yeah so um kamehameha schools bishop
estate owns a lot of property especially
rural areas so
on oahu
scott can correct me if i’m wrong here
but
condos are usually sold right when
you’re looking at leasehold properties
you’re normally dealing with a condo on
the big island the majority of
properties we do have a few leasehold
condos but the majority of leasehold
properties are going to be
agricultural type properties larger
acreage you know an acre or bigger where
uh bishop estate owns that land and then
they lease it out to to farmers and so
from an advantages standpoint the
advantage is price right you’re gonna
pay 50 to 30 percent less for a
leasehold property than you are a fee
simple property so my advice to somebody
considering leasehold whether it’s condo
or
or agricultural is you got to look at it
as a business and just run the numbers
do the analysis on whether or not it
makes sense for what you want because
it’s not a real estate investment you’re
not going to see appreciation over time
the value really goes down as the lease
gets shorter but if you can get a nice
oceanfront condo for
30 40 less than you can get a fee simple
condo and you can vacation rent it for
20 years and you can run the numbers and
figure out okay i can make this much
money over 20 years and it makes and it
makes sense as an investment that way
then go ahead and do it same thing with
agricultural properties you may be able
to figure out what your production is
going to be whether it be coffee mac
nuts avocados whatever you’re doing and
you kind of have to look at it as how
much
uh income is that property gonna yield
over time and what are my leasehold
costs to purchase and then there’s also
lease rent and a lot of leases you have
a production percentage that you give um
to commemorate schools also so you just
got to look at it run the numbers look
at it like a business and
if that’s what you want to do and it
makes sense for you then then do it but
if you’re looking to build equity pass
it down to your heirs you know
move up in the future
it doesn’t have those same type of
advantages so the moral of the story
here is look at it as a business run the
numbers and know that you know when the
lease runs out you will no longer have
this property generating whatever it’s
generating on it and you know you’re
very likely to get especially on the
agricultural properties if you’re caring
for it properly you’re following the
rules and the terms of the lease you’re
very likely to get it renewed but again
you have to act like there’s no you have
to plan that you’re not going to get it
renewed and what you know what are the
implications of that so correct
so you gave more of a sort of a positive
thing as scott you know what would you
let’s let’s give the counterpoint on
there what would be the disadvantages
why would you not so dylan gave a bunch
of reasons and the conditions of why
what would you not get a a leasehold
property scott
yeah i mean the main thing is when you
buy real estate you want that
you want it to have increasing value or
have value over time you know you can
buy at least hold property with
financing but you have to have
six more years left on the lease than
the length uh than the length of the
mortgage so in other words if you buy a
property with a 30-year mortgage that’s
leasehold you have to have 36 years left
on that lease the minute you start
getting down lower on that lease now
people have to pay cash for it so the
value of that property is going to
significantly diminish
and at the end there’s typically
reversionary clauses about one percent
of the properties on oahu are leasehold
so they’re not too many of them and most
of them were condos and they were
designed originally to give
affordability to people to be able to
buy in because you’re not buying the
land and you have this
finite period of time that you you can
own it they originally started at 99
year leases
problem is they’re getting much shorter
my family owns one at san souci where
the lease is up in four years where it’s
it they’re either going to renegotiate
the lease for a longer period of time
sell the fee to us where we then we
would trent you know own the land at
that point and go to fee simple or we
walk away from the unit and turn it over
to that landowner and then you walk away
from the money that you put into it