Thoughts on leasehold units?

Question

Hi All,

Curious to get everyone's thoughts here on buying leasehold properties from an investment standpoint. I'm looking to purchase a condo in the $400-$800k range, and plan on making it a STR. Undecided if I will self-manage or hire a property manager.

I've been excluding all lease-hold condos from my search, but on second thought, maybe it makes sense? I know the property will appreciate far less, but the reduced price would significantly increase my cash flow.

Thoughts?

Kevin Ing · Answer

Agreed. I was speaking in terms of a real estate investment.

It can also work for elderly people who more than likely will not live beyond the end of the lease period. It can allow them to live in a nicer property than if they were to purely rent or buy fee simple.

Kevin Ing · Answer

@Zander Kempf  Thanks for confirming my fears about leasehold.

In most situations it's a depreciating asset for the owner of the structure, making it the opposite of an appreciated real estate investment. Best to avoid 99% of the time.

Zander Kempf · Answer

@Kevin Ing You pretty much covered it. The lessor has a much more advantageous position. I've seen an owner do a 500% increase on lease rent, and the lessee had no choice other than to accept it or walk away and give up the buildings they had built.

Kevin Ing · Answer

Question to all: What are the possible scenarios at the end of a lease?

A) Renegotiate to extend the lease and settle on a new monthly lease fee, whatever that may be (lessee has almost no bargaining power?)

B) New lease cannot be agreed upon and you walk away from the property -- forfeiting all the improvements which become property of the lessor?

C) Renewal is not offered and you lose the property -- perhaps the building is to be demolished, etc.

Any other scenarios?

Kelly Alliger · Answer

That is an interesting reply.  I am considering a leasehold unit on Oahu.  10 years left, cash purchase, not to be rented out, just for our family to use as a vacation home.  The lease is up for renovation in 5 years.  Is there a rule on how much it can increase by?  If it's $500/mo now can it double?  That's the only thing I'm concerned with.

Elijah F. · Answer

Looks like the monthly maintenance fee for that unit is $1,169 and monthly lease rent is $925. So monthly, you would pay $2,094 for this unit before any other expenses. Also, you can't (or it is REALLY difficult to) finance this unit.

Joel Bongco · Answer

@Rachel De Villava.  Leasehold properties are pretty tricky and doing your homework and  your due diligence is a must.  In my case, here are the details:

• Location: Waikiki, Hawaii
• Unit: 1 Bedroom/1Bath
• Lease Term: 30 years 
• Lease Rent: $540/mo
• Maintenance: $450/mo
• Purchased: $45,000
• Rehab: $18,000
• Holding: $4K
• Sold: $128K
• Profit: ~$60K+

In my opinion, risk was low, the margin was pretty good, with  minimal costs from a Hawaii perspective (everything is expensive here!!).  I'm still not big fan of leasehold properties due all kinds of risk variables.   I would advise to stick with fee simple properties unless the numbers look super good.  IMHO, some Leasehold properties here in Hawaii are traps...Please PM me if you want to talk via phone.   HTHS!  Aloha,  Joel

Mark Waite · Answer

Account Closed I have found LH properties do not cash flow well, much less positive. At the first of the month, you’re writing two big payments (HOA and LH) that your STR has to cover. Then you still have mortgage, insurance, utilities, property management.

Also I see many LH properties are listed within two to three years of the renegotiation date. That is an unknown expense that will likely increase.

Now if you can find one with 6-7 years left, you might have a short term appreciation play.

Anyway, just my two cents based on looking at them for my clients.

Mark

Duc Ong · Answer

Account Closed It would definitely depend on the numbers and your projections for STR. LH is usually not good from a long term perspective, since the value goes to zero at the end of the lease. However, if it's a short term play, it might be worthwhile to explore.

Carlos Ptriawan · Answer

The other problem with FS vs leasehold is, at least not in South Oahu, the price between FS and leasehold is not that much different, only a few hundred PSF differences ( in terms of dollar, only $150k differences). I'm wondering who in the world would like to buy leasehold especially if they don't live there, it's not attractive unless you know something that we don't.@Kevin Ing is right. Most I knows that's buying leaseholds are 70 y.o. retirees. Lot of bay area seniors did that.

Thoughts on leasehold units?

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