Leasehold Condo

8 Replies

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!

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!

Originally posted by @Dana R.:

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

 Actually leasehold values may very well go up just like fee simple properties as the value is based on supply and demand.  It is true that each year you have one less year of utility and ownership right that you are selling and that MAY have an impact on value.

@Dana R.  I didn't realize it was possible sometimes to buy out a lease and convert to fee simple. When does that happen?  I saw a property last year that had a lease that was almost up and was being advertised as non-renewable. What happens to the house at that point? I lived in New Zealand where this is also common but never purchased a lease-hold property.

Medium team zen logo vMicki M., 33 Zen Lane | [email protected] | http://www.33zenlane.com | CO Agent # 100037721, NM Agent # 19441

When I was shopping around for Hawaii condos a few years ago, I only read up on condo leases, not house leases. Perhaps the leases work the same, perhaps not. It's best to talk to a knowledgable real estate agent in Hawaii about leases since each lease document is unique.

In my Hawaii condo research, I found out that:

leases can be owned by individuals or corporations

the individual or corp. is under no obligation to sell the fee to the lease

IF the fee does become available for purchase, I'm not sure how the fee price is determined

at the end of the lease, different scenarios may happen. You would need to read the condo's lease to discover what those scenarios are. One possibility is that the condo is surrendered to the lease owner.

Okay, that's what I know about leases… just some basic info. I'm sure a real estate agent in Hawaii could answer more in depth!

@Ally H.  

 @Micki M.  

I bought a leasehold coop in Diamond Head in 1978.  At that time state legislation was very pro owner occupant and generally fee owners would be required to offer the fee to them when the lease expired AT current market value.  Now our leases weren't going to expire until way after we had flying cars, as promised. Yep, we controlled the property until 2015! Cue 2001 A Space Odyssey music.

In the late 90's we were coming up on a lease rent step up.  Unfortunately for the fee owner the step up was capped (by the lease) at a low dollar or percentage amount so they were looking at an additional dollar or two per unit for the next almost 20 years on an already low lease rent.  So they offered to sell the fee to us that of course was discounted by our leasehold interest and a generally down market cycle. So we went fee simple and condo.

Now the laws are more fee owner friendly and leases are starting to end and the leasehold owners have to walk away!

There are smaller properties in Waikiki that have been offered lease extensions because the owners control adjacent properties that expire at later dates so they want all leases to expire at the same time so all the properties can be developed at the same time.  There are some smaller properties (less than 50 units) that may still have less than 10 occupied units because most owners have abandoned them because the cost to maintain is higher that they can rent them for.  This gets worse as they get into the final years.  Why maintain something you'll be handing over in a few years.  The sad thing is that some of these properties cannot be replaced on the small lots because of the modern codes and set backs and they can't e assembled with adjoining properties.  I know people that are trying to buy their fee but even though the appraisal says the property in only worth a couple of million because it can't be developed they are holding out for ten plus million.  I don't know if the fee owners think they will get waivers from the city when their property becomes a blight. 

There may be a way to game the leases if you can find ones long enough that have step ups limited and maybe take control of the HOA. Your vacation rental won't be attractive in the last ten years of the lease because maintenance will come to a halt.

@Bob Bowling , @Dana R. ,@Micki M.

Thank you all for sharing your experiences! From my discussion with others and further research, I don't think that we are quite comfortable enough putting the few eggs that we currently have in a leasehold condo given that there are factors outside the real estate market that severely contribute to whether that egg will grow or be taken away at some point. Bob, we are definitely admirers of your RE success in Oahu and hope to follow a similar path:).

Mahalo!

HI Ally,

I was AD out at Hickam, now a Reservist now RE Agent/Investor in Hawaii. 

I can certainly tell you Lease Hold is not the way to go unless there's an option to buy the fee down the road. LH units are dying breed here in Honolulu. As time on the lease gets shorter the harder and hard it is to sell nor get a loan on. Although they make sense in terms purchase price usually the older building maintenance fees are high as well as the extra lease fee. However, most of my experience with LH is at Discovery Bay and Executive Centre.  

If you haven't used you VA loan yet. Try buying at Fee Simple, live in it for a year as required and then rent? As AD E-5 and up you should be able to find something.

Joe Sillaman, Hawaii Life Real Estate Brokers | [email protected] | 808‑561‑8384 | HI Agent # RS-75827

My experience with leasehold is limited, but I generally agree with @Joe Sillaman . I'm about to list a townhouse flip for sale in Pearl City that I recently acquired. It was leasehold but the only reason I agreed was that the fee was also available for purchase, so I made sure to acquire both.

Medium oahu home buyers logo2Michael Borger, Oahu Home Buyers | (808) 377‑4379 | http://www.oahuhomebuyers.com

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you