I recently came across a condo that can conservatively make a little over $400 a month in a very desirable tourist location. However, condo has a ground lease that expires in 2049. Condo is going for $125k, I would need to add about 10k in renovations. I can rent it to military and cash flow about $400 or I can Airbnb it and cash flow about $700 or more. I looked into ground leases and learned that upon lease expiration, property and any development reverts back to the landowner. What are your thoughts? Would you purchase this ground lease condo? The numbers make sense but the fact that I will never have equity/ appreciation is holding me back.
Great post! What program are you using for this?
Proceed with caution. I've helped clients buy in land lease buildings but in all those cases there was something like 80-100 years left on the lease. These properties usually trade at a discount because of the stigma but my clients know what they're getting into. Most lenders will not give a mortgage in a ground lease that expires in less than 30 years and you can expect the common charges to go up significantly if a new lease is negotiated. That's if you get a new lease. Worst case is the terms are so bad and the common charges go up so high they make the condo units worthless, or the landowner refuses to renew so he can build or sell something more profitable. Those two scenarios are playing out right now at two ground lease co-ops I know of. One is a couple blocks from Central Park where the apartments should be worth a few million easily. The maintenance has gotten so high they're essentially being given away. The other is in Chelsea where the owners are being evicted!
Ground lease buildings are typically depreciating assets whose value goes to zero upon the end of said lease. So no, I would not purchase it.
@Jason Lee thank you! I won’t be making an offer. I don’t see the owner renewing the ground lease and if they do, it will not be cheap- the numbers will not make sense then.
@Russell Brazil thank you! I won’t be making an offer. Maybe if it had a longer lease I would. I’d be on the hook for a mortgage without owning anything.