why buy a house on lease hold land?

Question

Why would somebody purchase into a lease hold? Here in Hawaii there are houses being sold on lease hold land. Any input? I just need some additional insight to make sense on purchasing a house that sits on lease hold land. Why would you do that? I don't know much about lease hold properties and have been trying to do some research but I'm still having difficulty making sense of the general equation; what good was your $300,000 investment into buying the house when now the lease on the land is up???? Please somebody enlighten me because I'm finding myself obsessing over this haha

Jordan Sunshine · Answer

In some cases it might actually be beneficial for you to buy a house on leasehold but only if you do it right!

For example, say I bought a house on leasehold with RIGHTS TO BUY in 10 years AT X PRICE! (Kinda gave away the whole reason why it would be a good idea xD) guess what I'm doing now. I'm effectively buying a house for a lot cheaper than I would be able to get it otherwise and I already locked in the purchase price after X years. This means that the person who sold me the lease hold is legally bound to sell me the property (If I want it) after X years.

Now of course if I did my math and all the numbers checked out and I could make money on the lease hold as a buy and hold property until the time of the lease is up then I buy the property and actually own it, now I can turn around and sell it as a flip and make large capital gains on it.

Now depending on the price of the lease hold you might be able to throw upgrades into the house and raise your rents but still cover your expenses and gain a good ROI so when those repairs pay themselves off you are now gaining more cashflow than before and when you go to sell the property you only need to do minor fixes if anything.

There are also other benefits to buying leaseholds again depending on the contract. If you have it in the contract where it says you WILL buy the property after X years then you are legally bound by that contract as well to purchase the property after those X years. Now you technically already own the place (after x years of course) and in some cases this is legal and others not so tread lightly but you can effectively fix up the property, increasing the value of the property, and turn around and sell a 2nd leasehold with option to buy but this time with a higher price then what your lease hold and option to buy is. (since you already said you were going to buy the property!!! <--- BE CAREFUL WITH THIS AND TALK TO A LAWYER)

This is technically a sandwich lease. As you are still paying the person who you are going to buy the house from in X years but now you have someone paying you a greater amount and they also have the option to buy in X years (Your X must be greater than the X you agreed to on the first leasehold) so to break it down in money terms... I buy a leasehold with AGREEMENT to buy (not an option) for 300k now and 600k in 10 years. I take a mortgage out for 300k now and start to pay it off while I improve the property. I've increased the value from 900k (300k+600k) to 1.5m due to repairs (for example) and I now turn around and put it on the market for 500k lease hold for 11 years with OPTION (or agreement) to buy at 1m (notice its longer than the first because I don't OWN the property until after the 10 years (this is where lawyers come into play technically selling something that isn't yours YET))

This now means you are paying a mortgage of 300k for 10 years BUT someone is paying you a mortgage of 500k for 11 years. You are also buying the property for 600k after 10 years and giving the person you are lease holding to the option to buy the property at 1m after 11 years.

There are TONS of other legalities that would take weeks if not months to talk about and sort out between you, the person you are buying from, the person you are selling too, and the HOA if you are purchasing a property on top of a property (for example a condo) but there is money to be made IF DONE RIGHT.

Please I highly suggest anyone with more extensive knowledge critique my post and iron out any of the wrinkles you may see in it and continue explaining if I missed any crucial parts. Again I highly suggest getting a lawyer for all of this and make sure you are doing it 100% right or you could royally screw yourself big time.

Hope that I've cleared that up a bit but I'm sure I've also made more questions as well XD sorry :P

Michael Borger · Answer

I just bought a leasehold condo in the Marco Polo building a couple weeks ago -- it's all about the comps and making sure there's enough time remaining on the lease to still make it a marketable product.

Jay Hinrichs · Answer

just very common in Hawaii.. talk to some good local brokers they will fill you in.. better than asking on BP this is a very regional question.

Jerrod Avegalio · Answer

Thanks for all the input! I'm really appreciating the ability to get feedback from experienced investors. This forum is like a magical book store! Aloha to you all, thanks again.

Loren Clive · Answer

It just has to pencil out. And at some complexes it does. Specifically Kahana Outrigger on Maui.

Or if the fee is available.

Elizabeth M. · Answer

@Jerrod Avegalio  Here's an article, dated 2014, that seems an easy read of key points to have in mind when you talk to local brokers as suggested by @Jay Hinrichs.   Wish I had this info, earlier!

http://www.hawaiibusiness.com/leasehold-properties-a-deal-or-a-drain/

Michael Gayer Jr · Answer

@Jordan Sunshine , thank you for the input.  Could you bring a little more clarity in mind by giving me an example from the MLS?  Or one that you've bought that fits this scenario.

Thank you in advance.

why buy a house on lease hold land?

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