Hawaii’s real estate market is unlike any other in the U.S., and one of the biggest distinctions buyers encounter is the difference between leasehold and fee simple properties. When you’re looking to buy your first home, understanding these ownership structures is crucial.
What is Fee Simple Ownership?
The most common and sought after form of real estate ownership is Fee Simple. With a fee simple ownership, you own the land and the improvements on it indefinitely. Such as the home, condo, or townhome. You can do with it as you please, whether it is selling, renting, or passing it down without any restrictions (aside from zoning and association rules).
Pros of Fee Simple Ownership:
-Full ownership of the land and any structure on it
-No lease payments or terms to a landowner
-Typically holds more value
-The ability to pass it down to heirs
Cons of Fee Simple Ownership:
-More expensive that a leasehold property
-Subject to property taxes and association dues is applicable
What is Leasehold Ownership?
The other type of property ownership is a Leasehold. Meaning you own the property or structure but not the land that it sits on. With a leasehold, you are leasing the land from the landowner for a specified length of time, which typically starts at 30 years and can be as long as 99 years. Before the expires you may have the opportunity to renegotiate terms, purchase the fee, or vacate the property. If the landowner is not willing to do any of the previously mentioned options, then the land would simply revert back to the landowner.
Pros of Leasehold Ownership:
-Lower purchase prices in comparison to fee simple properties. This is especially beneficial when you are not planning to live in the property for an extended period of time.
-Can be a cost-effective way to live in a more desirable area
-Potential to purchase the land fee or renegotiate lease terms
Cons of Leasehold Ownership:
-In addition to your monthly mortgage and association fees there is a monthly lease payment
-Depending on the terms of the lease and/or amount of time left on the lease, the terms can change
-Uncertainty when approaching the end of the lease term
-Finding a lender willing to finance can be challenging, especially if the time left on the lease is less than 30 years.
Why Does Hawaii Have Leasehold Properties?
Hawaii has a unique history when it comes to land ownership, and many of the large landowners want to retain ownership of their lands so they lease parcels of land to homeowners, businesses, or farmers. While there have been some instances where leasehold owners have had the opportunity to buy the fee, many properties in Hawaii remain under a long term leasehold.
Should You Buy Leasehold or Fee Simple?
The answer to this question depends on your financial situation, risk tolerance, or short/long-term goals. If you are looking for long-term security and ownership, fee simple would be the more ideal route to go. If affordability and short-term ownership is your primary concern and the leasehold terms are agreeable, then a leasehold property would be your best viable option.
Key Questions to Ask When Considering Leasehold:
- How many years remain on the lease?
- How much is the lease rent, and can it increase?
- Is there an option to purchase the fee simple interest?
- What happens when the lease expires?
Final Thoughts
When searching for a home in Hawaii, it is important to understand the difference between a fee simple and leasehold property. If you are considering buying a home in Hawaii it is important to hire a real estate professional that can help you determine which option would best fit your needs. Need Help Navigating Hawaii Real Estate?
If you’re thinking about buying or selling in Hawaii and want expert guidance, feel free to reach out! I’d be happy to help you explore your options and make the best decision for your future.