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What is the difference between Fee Simple and Leasehold Properties?
October 12, 2018 | Joe Kubelka
Aloha. My name is Joe Kubelka and I’m with Island Sotheby’s International Realty here on the island of Maui.
I’m 1/2 of the Maui Real Estate Advisor Team. I wanted to take a quick minute to make a video about the difference between Fee Simple and Leasehold properties.
One of the most common conversations that I find myself having with folks who are using my website is the difference between fee simple and leasehold. Fee simple is the easy one to start with because its the most common type of property ownership
that people are used to.
Whether you pay cash for a property or you have a mortgage you receive the title. At that point you own the property outright and it’s what people are used to.
Leasehold is a little bit different. Leasehold is a long term lease on the property. We do have several condo complexes here on Maui that are leasehold properties. They can either be the entire property that is leasehold or there are some that are
mixtures where some units are leasehold and some of them the fee has been sold to people and they own fee simple within the same complex. So what leasehold is it’s a long term lease on a property.
All of these leases are going to have an expiration date. They are bought and sold just like fee simple and they will show up on the MLS but you will find typically that the price is going to be a little bit lower or quite a bit lower than what a
fee simple property will be. You could end up getting an oceanfront 2 bedroom condo in the $500,000 range. The thing is that lease does have an expiration date. There is no guarantee that you will retain ownership of that property when the lease expires.
It’s common that property owners renegotiate the lease and people are not put into that situation but it could potentially happen.
So for those folks who are looking for a long term investment fee simple is usually going to be a little more appealing to them. There are folks out there that do find that the return on their investment for the leasehold is worth their while.
If you can get an ocean front complex and it’s vacation rentable and you are paying significantly lower than the fee simple you can turn around and potentially rent out that property out for the same price as a fee simple oceanfront vacation rental
and you are recouping some of the money that you’ve spent on it. You get to use it when you are not renting it or at your leisure and it can work for some folks.
The other thing to be aware of when it comes to leasehold property is that the taxes are assessed at the fee simple value, so as the property get’s nearer to the end of it’s lease term essentially it’s losing value. You can turn around and sell
Say you bought something that’s $500,000 you could turn around and sell it the next year for maybe the same price, or who knows depending on how quickly the market’s changing but if you wait 10, 15 years and there is no renegotiation of that lease
the price you can sell it for is not going to be the same as if it were fee simple. It depreciates as apposed to appreciates.
That’s kind of the basics on the differences between fee simple and leasehold and I just wanted to share that with you. If you have any questions please don’t hesitate to reach out. I’m happy to explain more or send you examples of fee simple
and leasehold properties. Thanks for watching.
Island Sotheby’s International Realty