Lease Hold rental as investment

5 Replies

I just hopped onto the Bigger Pockets forum to ask this exact question. I am thinking about "purchasing" a condo in Honolulu, Hawai'i with a leasehold structure and plan to rent the other (1 or 2) extra bed space(s). I know the HOAs in Hawai'i are fairly steep ($500-$5000) but I feel that if you found a leasehold property with a cheaper HOA fee, then it would be feasible to pay off say a 30yr fixed mortgage payment + HOA + lease rent (not sure if lease rent applies in all cases) every month ( or at least most of it).

With a leasehold, you do not build equity so @Jeremy Quilon I am not sure how practical it would be as a property investment.  I believe the land lord also can demand the property back at any moment (correct me if I am wrong here).  For myself, however, I feel as thought it might be a good way to live cheaply in a nice area while building up a stack of cash for a down payment on another (perhaps investment) property.  

I'm really wondering if there are any pitfalls to watch out for here and perhaps any tax situations of which to be mindful.  Hopefully there are some Hawaiian locals in the Bigger Pockets network that can answer this most accurately.  If you know a thing or two about lease holds and don't live in Hawaii, I would still love to hear from you too!

I've flipped some leasehold properties before, but I wouldn't consider them long-term investments since they're a diminishing asset (at the end of the lease you're left with nothing). However, like you say, perhaps you can find one that works for your individual cash flow needs if it's cheap enough. Just be mindful of potential any step-ups in the lease schedule. I'm not so sure you'll find this any cheaper than just renting if your primary concern is saving up cash - the lease rents plus maintenance fees can really add up.

I agree that leasehold properties are not very good investments. They fit a very narrow user profile, and I tend to steer clients away from these.

Thank you all for your quick responses! The BP community is strong!  Everything you all are saying confirms what I have been learning by talking to agents in Honolulu.  I also recently figured out that if the property sells for less than the amount that is left on the loan, then you are liable to pay the remaining balance of the loan when the property sale is closed.  So if you got a $500,000 loan for a $500,000 house with a leasehold structure and you decide to sell 5 years later and you paid a total of $100,000 on the loan leaving a balance of $400,000 but the home sold for $300,000 due to the depreciating nature of the property, then you would have to pay the loaner $400,000 - $300,000 = $100,000.  That sounded crazy to me but it left me wondering if this situation would also be true for a fee simple loan?  Would you have to pay the remaining balance after closing the sale on a fee simple loan or do you continue paying month to month?