Many people assume their only options when it comes to real estate are to either rent or buy property. However, there is a third choice called a leasehold estate that combines aspects of both renting and homeownership to provide a unique way to obtain property. Here's more information about this real estate arrangement.
A Unique Rental Opportunity
A leasehold is, essentially, a long-term rental contract. Instead of the periodic tenancy most people are familiar with that usually lasts a year, the renter leases the property for several decades, with 99 years being fairly common. The renter's tenancy also affords the person with some of the benefits of being an owner; namely they are typically free to make renovations to the property, rent it to others without requiring permission from the owner, and even sell the leasehold to another interested buyer.
However, once the lease ends or is terminated, the property reverts back to the owner. The renter is not entitled to any compensation for renovations or improvements made to the property, even if those changes increased its market value.
Leaseholds are common in commercial real estate where companies are more likely to set up shop in one place and stick around for decades or centuries. Sometimes, though, you can find leasehold contracts available in areas where there isn't a lot of land (e.g. islands) or there's a lot of competition for property.
Why a Leasehold May Make Sense
There are several different reasons why you'd want to consider opting into a leasehold, despite the apparent drawbacks. The most obvious reason is you wouldn't have to worry about rent hikes. It's par for course for apartments and other temporary rental facilities to increase the rent every so often to keep up with the local market. With a leasehold, the monthly amount negotiated with the owner would apply to the entire contract regardless of what the market does, which is good for people on fixed incomes or who want to use the leasehold for investment purposes (e.g. rental income).
Another reason you may want to opt for a leasehold is if you don't have the credit or income to qualify for a traditional mortgage. Getting a house note from a bank is more challenging these days because of the real estate fallout of 2008. Conventional loans require a minimum 620 credit score, while people can get a FHA loan with a 580 score. For the best interest rates, though, you need a score in the 700s, and you also have to come up with money for a down payment, closing costs, and other expenses.
Although a leasehold may require a down payment, it's typically significantly less than the 20 percent asked for by most financial institutions. Because you're renting and not buying, the landlord may be more willing to work with you if you have troubled credit but enough income to pay the rent every month. If you want to purchase the home, you can strike a deal with the owner to have a portion of your rent go towards the purchase price and work on improving your credit so you can qualify for a loan when you rental term ends.
A third advantage is the estate planning benefits associated with leaseholds. These rental contracts can typically be passed down to heirs, so you can guarantee a place to live for your children and grandchildren without locking them into the long-term commitment associated with homeownership. If you're single, don't have kids, and not concerned about leaving property to other living relatives, then a leasehold may be a good option to experience homeownership without worrying about what will happen to the place when you're no longer around.
For more information about leaseholds or to explore other types of home and rental options, contact a real estate agent.