Leasehold properties
the good and the bad
Use these questions to get all the information you need to decide if a leasehold property is right for you
Pros
Cons
Questions to ask
Pros
- A leasehold property is usually less expensive than a comparable fee simple property. This is due to leasehold property having a finite period of ownership.
- Since the lease is depreciable, there may be tax advantages for the purchaser.
- If a person only wants to live here for a finite period of time, or they are elderly and know that they will not outlive the lease, a leasehold property is a viable option since the person is not concerned about appreciation and the leasehold would be cheaper than a comparable fee simple property.
Cons
- A leasehold property is not as transferable as fee simple property because of loan restrictions regarding leasehold property. Lenders usually require that the remaining term of the lease be at least 5-10 years longer than the term of the loan, though lending requirements constantly change.
- Lenders may also have concerns regarding renegotiated rent. Loans backed by the Veterans Administration and Federal Housing Administration have additional funding restrictions.
- The lessor has to consent to the lease, though by law it is not supposed to be unreasonably withheld.
- Ownership is for a finite period (the length of a lease).
- Possible lease constrictions such as the lessee not being able to build an improvement on the property.
- Subject to the surrender clause, the lessee must remove themselves at the end of the lease.
- Though the land may appreciate in value, the lessee cannot take advantage of the appreciation since they do not own the land. At the end of a lease, the leasehold owner no longer has an interest in the property so they do not get to take advantage of property appreciation.
- The value of a lease decreases over time since the remaining period of the lease diminishes over time.
Questions to ask
- How long is the lease term?
- When is the expiration date?
- Is there an extension clause?
- How much is the lease rent?
- When are the lease rent renegotiation dates?
- How will the new lease rent be determined?
- What are the terms of the surrender clause?