Hawaii real estate is unique in that many land on which building stands are owned by separate owner. The Bishop Estate owns many land in Hawaii, and so are many private owners.
What is leasehold properties?
Leasehold properties are buildings or structure that stand on a leased land. The owner of the building or structure own all of the structure on the land, but pays lease rent for the land on which is the building or structure sits.
Most home buyers shy away from leasehold properties because they are afraid of the lease rent and lack of control. Most home owners wants to own their home AND the land under it free and clear. Besides, lease are renegotiated every so many year, so there is chance that the new negotiated fees may be more than what the owner wants to pay, and this makes many people uncomfortable with purchasing leasehold.
Besides, it is generally more difficulty to get financing from banks, especially if you don’t have the cash, and needs financing. Most banks require the leasehold properties to have at least another 50 years remaining on the lease.
Some banks may be able to finance your leasehold properties purchase with portfolio lending.
At lease expiration, it is up to the lease fee owner to either extend the lease for or take the land back. In the case, where the lease fee owner decides to take the land back, that means the building on the land has to go “poof” or demolished or the lease fee owner may take the building and do whatever they want.
This is the biggest fear of leasehold properties purchase.
But Why You Still Want to Buy Leasehold Properties for Cash Flow?
For a savvy real estate investor, purchasing leasehold properties make sense. If you ask 10 people, 9 of those would tell you Honolulu is a horrible place for real estate investors because real property price is too high to provide good cash flow.
These people are missing out on a big lucrative market.
The purchase price of a leasehold property is usually a lot cheaper than fee simple. Of course, you’re not buying the land. You’re only paying for the structure. You pay the lease rent, or should I say your tenant pays the lease rent for you. But YOU write off the lease rent as tax deduction as operating expense.
This is how you can get properties with CAP rate of 6% or more. If you manage your property well and put it into good use, you can get even up to 30% CAP rate.
I can show you how.
If you get yourself a good deal, and you recooperate most of your initial investment before the lease expiration date, you’ll not have to worry about the lease fee owner taking the land back because you would have made your money back many times. If the lease fee owner extends the lease, that’s even better for you, your property continues to generate cash flow for you.
Here's another trick, I generally look for condo buildings where the lease fee is available to purchase. This gives me more control, and I know it will be my choice to give up the condo when the lease expires.
The other benefit is that when I'm ready to refinance, I can purchase the fee and own the condo free and clear.
The best time to buy a leasehold condo is when the condo AOAO just purchased the lease fee for the building and selling to the owners. This usually put pressure on the condo and many would choose to give up and sell their condo as leasehold. This makes them motivated to sell as many does not have the mean to purchase the lease fee or to get financing to purchase the fee.
Leasehold Property and Sandwich Lease
The concept of using leasehold property for investment is sort of similar to a sandwich lease.
In sandwich, you, the investor rent (lease) a condo from the owner, and you turn around to sub-lease the unit to a renter.
Say, you found a really nice rental property in a nice, highly desirable neighborhood with good school. The owner is asking for $2,000 a month rental income. You know you can rent this for $2,200. You rent the unit from the owner for $2,000, then you find a renter who is willing to pay you $2,2000 per month for this same unit. In this case, you cash flow with none of your own money $200 per month. No maintenance on your part either, because you’re not the owner.
Before you to start doing this, you need to be sure that the owner is okay with you sub-leasing. Just common courtesy.